Journal of Strategy and Management

The customer-centric logic of multi-product corporations

Lalit Manral
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Lalit Manral , (2016)," The customer-centric logic of multi-product corporations ", Journal of Strategy
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JSMA
9,1
The customer-centric logic of
multi-product corporations
Lalit Manral
74 Department of Management, College of Business,
University of Central Oklahoma, Edmond, Oklahoma, USA
Received 7 May 2015
Accepted 23 July 2015
Abstract
Purpose The purpose of this paper is to articulates a customer-centric logic to explain the strategic
behavior of multi-product corporations whose portfolio of complementary product offerings belong to
diverse industries.
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Design/methodology/approach The paper develops a theoretical framework to explain the

heterogeneity in multi-product corporations motivation and ability to leverage the demand-side
strategic assets developed in their home-markets to enter new markets and thereby improve their long-
run corporate performance.
Practical implications The paper includes implications for strategic behavior of multi-product
corporations in various industrial sectors such as telecommunications, financial services, consumer
discretionary and staples, real estate, and so on.
Originality/value The profitable applicability of demand-side strategic assets to new contexts
should be explained both by the motivation of multi-product consumers (to purchase a portfolio of
complementary products from a diversified seller) as well as the motivation of multi-product
corporations (to leverage their demand-side strategic assets to enter new markets).
Keywords Customer-centric strategy, Multi-product corporations, Multi-product customers
Paper type Conceptual paper

Introduction
We invoke a theory of demand-side diversification to explain the strategic behavior of
multi-product corporations that serve portfolios of complementary products, which
may originate in different industries. The alternate customer-centric strategic logic
featured in this theory explains why a firm selling product A may offer a
complementary product B (from another industry) without actually possessing the
supply-side strategic assets that can be shared across the two businesses. Our theory
features multi-product consumers whose consumption value increases if they purchase
one or more complements to a basic industry product. Our arguments are analogous
but not similar to the argument in the marketing literature on multi-product retailers
(Rhodes, 2015). Hence, our theory excludes multi-product retailers (e.g. Walmart, etc.)
that subsidize a few basic products and charge higher prices for the rest.
It remains an empirical fact that strategic behavior of many multi-product
corporations do not render themselves explainable in terms of extant product-
centric supply-side logic of related diversification (e.g. Ye et al., 2012).
The pervasive corporate practice of offering complementary products observed
across such diverse industries as consumer banking, telecommunications
services, residential and commercial properties, etc. is an exemplar of the
unexplained pattern of diversification behavior. Even though these multi-product
Journal of Strategy and
Management corporations satisfy the conceptual definition of diversified firms (Gort, 1962;
Vol. 9 No. 1, 2016
pp. 74-92
Teece, 1980; Ramanujam and Varadarajan, 1989), the myriad supply-side
Emerald Group Publishing Limited
1755-425X
theoretical rationales for the corporate advantage do not really capture the
DOI 10.1108/JSMA-05-2015-0036 performance benefits that accrues to them.
 A few conceptual papers invoke the value-based business strategy framework Multi-product
(Brandenburger and Stuart, 1996) in conjunction with the one-stop shop convenience corporations
argument in the marketing literature (refer Rhodes, 2015, for the latest review) to
develop a demand-side explanation of how firms consumer-focussed strategies
influence value creation and appropriation (Adner and Levinthal, 2001; Adner, 2002;
Adner and Zemsky, 2006; Priem, 2007; refer Priem et al., 2012, for a review). In fact, a
couple of papers suggest that firms horizontal scope decisions may also be motivated 75
by demand-side considerations of exploiting consumer synergies instead of just
supply-side synergies featured in the literature (e.g. Chatain and Zemsky, 2007; Ye et al.,
2012). On the other hand, Ye et al. (2012) in a conceptual paper posit two performance
benefits of demand-side diversification. First, the hypothetical revenue-enhancing
effect of demand-side diversification draws on the one-stop-shop convenience
argument that explains consumers willingness to purchase from a diversified seller
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(e.g. Porter, 1990; Klemperer and Padilla, 1997; Nalebuff and Brandenburger, 1995;
Nalebuff, 2003; Cottrell and Nault, 2004). The convenience of one-stop-shop is explained
in terms of both economizing effects (e.g. Klemperer and Padilla, 1997; Nalebuff and
Brandenburger, 1995; Nalebuff, 2003; Cottrell and Nault, 2004) and value generating
effects (e.g. Spiller and Zelner, 1997; Priem, 2007; Chatain and Zemsky, 2007;
Chatain, 2011). Second, the explanation of the hypothetical profit-enhancing effect of
demand-side diversification draws on the superior customer-value argument that
explains consumers willingness to pay a premium for a portfolio of complementary
products sold by a diversified seller. However, these rudimentary efforts at theory
building are yet to produce a coherent theoretical narrative capable of explaining any
phenomenon of substance (beyond a few simple examples) let alone provide a rigorous
framework for empirical validation of complex diversification phenomena.
We complement the aforementioned demand-side logic of (sic) exploiting consumer
synergies (Ye et al., 2012) with a customer-centric logic of strategic behavior of
multi-products corporations. Our explanation of demand-side diversification builds on
both the first, resource-based view of related diversification (for studies prior to 2000,
refer Palich et al., 2000; Miller, 2004, 2006; Levinthal and Wu, 2010; Wan et al., 2011;
Wu, 2013) and second, the market power advantage logic of unrelated diversification
(e.g. Caves, 1981; Sobel, 1984; Saloner, 1987; Bolton and Scharfstein, 1990). First,
our concept of demand-side diversification extends the product-centric logic of
supply-side relatedness featured in the resource-based view of diversification to also
include a customer-centric logic of demand-side relatedness in terms of shared
demand-side strategic assets (Manral and Harrigan, 2016). Second, our concept of
demand-side diversification builds on the market power advantage logic of unrelated
diversification to explain how multi-product firms leverage their demand-side strategic
assets in home market to possibly gain advantage in the target markets (Manral and
Harrigan, 2016).
The proposed customer-centric strategic logic of multi-product corporations not
only satisfies the primary condition of related diversification profitable applicability
of strategic assets in the target markets but also serves as the capstone for the logic of
demand-side relatedness. We define a firms demand-side strategic assets to include
those that either support its customers value chain activities, or underpin the linkages
between the its own value chain activities and its customers value chain activities.
Hence, the primary distinguishing characteristic of a firms demand-side strategic
assets are that they are embedded in a relationship with the firms current or potential
customers (Manral and Harrigan, 2015).
 JSMA The rest of the paper is organized as follows. The next section discusses the
9,1 phenomenon that our theory seeks to explain. The subsequent section briefly reviews
two dominant theories in diversification to identify the gaps that preclude their
application to explain the strategic behavior of many multi-product corporations.
The following section outlines the proposed customer-centric logic and develops a
comprehensive theoretical explanation of the strategic behavior of multi-product
76 corporations that offer a portfolio of complementary goods. The final section discusses
the implications for theory, empirical research, and diversification practice.

Phenomenon: corporate portfolio of complementary products

The phenomenological motivation of this paper is provided by the lack of a convincing
theoretical rationale for an important product-scope choice wherein firms offer a
portfolio of complementary products to provide greater value to their existing or
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potential customers. Herein, a seller of product A (industry A) also sells a

complementary product B (industry B) to its customers for product A. This corporate
practice of expanding product scope should not be confused with firms efforts to
increase product variety (e.g. Cottrell and Nault, 2004), or cross-selling (e.g. Akcura and
Srinivasan, 2005; Kamakura, 2007), or bundling and its variants such as mixed-
bundling, tying, metering, and so on (Nalebuff, 2003, for a detailed review).
Firms offering a portfolio of complementary products could be diversified within
and/or across industries. We distinguish between a within-industry portfolio and an
inter-industry portfolio of complements. If only for expositional clarity, we define
entities that offer within-industry portfolio of complementary products as
multi-product firms while those who offer complementary products across industries
as multi-product corporations.
An example of a within-industry portfolio of complements offered by a multi-
product firm would be that of (say) a toothpaste and toothbrush offered by an oral
products company (e.g. Erdem, 1998) whose demands are obviously positively
correlated and who share a common customer-base (e.g. Wernerfelt, 1988; Montgomery
and Wernerfelt, 1992). Another example would be the individually available elements
of Microsoft Office Suite a word processing software (Word), presentation software
(PowerPoint), a spreadsheet (Excel), and database software (Access) thereby offering
consumers a choice to purchase one or more of them. Similarly, many retail banks
provide a variety of other services (e.g. credit cards, etc.) to complement the checking
account services offered to their customers.
This paper focusses on the inter-industry portfolio of complementary products A and B
offered by a hypothetical multi-product corporation. On the supply-side, the
complementary products A and B are supported by distinct technologies or production
functions. On the demand-side, the two industries serve an overlapping customer-base.
Typically, consumers purchase both A and B to increase their value. An example of an
inter-industry portfolio offered by a multi-product conglomerate is provided by
D.R. Horton (www.drhorton.com/corp/), a leading builder and developer of single-family
homes, townhomes, and condominiums in the USA. It sells residential homes (product A)
and also offers mortgage services (complementary product B) to the home buyers through
a subsidiary DHI mortgage (www.dhimortgage.com/). Why would a home builder diversify
into mortgage services? However, not all builders own a mortgage company. A few have
tie-ups with mortgage companies and a few others do not provide the complementary
service. Similarly, why do not all retailers offer credit cards to their customers? Have you
purchased a Toyota car that was financed by Toyota financial services?
 The strategic behavior of multi-product corporations that offer an inter-industry Multi-product
portfolio of complementary products gives rise to important questions that are not corporations
really answered by the signaling theory of umbrella branding in marketing or the
product-centric logic of diversification. What common resources/capabilities explain
the logic of demand-side diversification other than the fact that the portfolio businesses
serve common customers? What contextual characteristics, if any, influence the firms
choice to diversify (or not) on the demand-side? If the aforementioned strategic 77
behavior contributes to overall corporate performance then prevents all business firms
from exploiting this practice to improve their performance? If not, then why do so many
firms choose to engage in this practice?
Yet, not all firms who choose to diversify on the demand-side succeed. In 1981,
Sears, Roebuck and Company, then the largest US retail store chain, acquired first,
Coldwell, Banker & Company, then the largest real estate brokerage in the USA, and
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second, Dean Witter Reynolds Inc., then the fifth largest brokerage house in the USA
(Ghemawat, 1999/2010). The objective of Sears demand-side diversification (by way of
acquisition) was to become the largest consumer-oriented financial service entity in
the country (NYT, 1981). The customer-centric logic of the demand-side diversification
was that it would allow Sears to sell a customer a house, get him a mortgage and
handle his investments, as well as sell him furniture and apparel, service his car and
write his insurance (NYT, 1981). A few years later Sears divested both subsidiaries.

Literature review: profitable applicability of strategic assets

Our proposed customer-centric logic of strategic behavior of multi-product
corporations that offer an inter-industry portfolio of complementary products is
underpinned by a theoretical explanation that combines the resource-based view of
related diversification (e.g. Chatterjee and Wernerfelt, 1991) with the market power
advantage logic of unrelated diversification (e.g. Montgomery, 1985, 1994). We review
both streams to address the conceptual gaps that preclude their application
(independent of each other or jointly) to explain the customer-centric strategic behavior
of multi-product corporations. On the one hand, the resource-based view of
diversification provides theoretical wherewithal to explain the economizing effect of
shared demand-side strategic assets but remain inadequate to the task of explaining
the value generating effect of shared demand-side strategic assets. On the other hand,
the market power advantage literature has struggled to empirically validate either
the actual deployment of the theorized anti-competitive mechanisms by unrelated
diversifiers in the real world (Palich et al., 2000) or the market power advantage logic
of unrelated diversification (Montgomery, 1994).

Sharing strategic assets across related businesses

Firms benefit from diversifying into those related businesses where they foresee efficiency
gains due to resource substitutability (e.g. Willig, 1979; Teece, 1980, 1982) and/or potential
for value generation due to resource complementarities (e.g. Teece et al., 1994).
Economizing effects. Multi-product corporations enjoy demand-side cost advantage
vis--vis their specialized rivals in the markets for complementary products
(e.g. Salinger, 1995; Klemperer and Padilla, 1997; McAfee et al., 1989). A firm incurs
demand-side costs to: acquire customers; retain existing customers; and convince
existing customers to use more (quantity) of the complementary product/service
offered. While the first (i.e. customer acquisition cost) is a one-time investment, the
 JSMA other two are recurring investments over the life-cycle of the customer (e.g. Jain and
9,1 Singh, 2002; Gupta and Lehmann, 2003; Manral, 2010). However, by ignoring how
multi-product firms economize on future investments of the second and third type
(referred above) the literature ends up providing a static explanation of the
economizing effects of shared demand-side strategic assets. Additionally, the literature
also does not distinguish between the types of demand-side investments on which a
78 multi-product firm is assumed (by the analyst) to economize.
We argue that multi-product corporations enjoy cost advantage over specialized
rivals in the target markets due to lower recurring costs of trying to retain their
customers and convincing the latter to use more of the complementary product/service
offered. A multi-product corporations demand-side costs incurred in market for
product A not only generate future benefits in that market but also the market
for complementary product B. Our argument rests on the explanation of future benefits
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of advertising and marketing expenses that has been discussed in the accounting
literature (e.g. Anderson et al., 2003; Kovacs, 2004).
Value generating effects. The literature on the performance benefits of related
diversification provides pretty slim pickings when it comes to the empirical validation
of the value creating effect of shared supply-side resources and/or capabilities across
related businesses (e.g. Markides and Williamson, 1996; Tanriverdi and Venkatraman,
2005; Miller, 2006). Does a multi-product corporations decision to offer an inter-industry
portfolio of product A and a complementary product B positively influence the value of
its demand-side strategic assets shared across the two markets for A and B? If so, then
how? In another empirical paper we explain how the shared demand-side strategic assets
contribute to the diversified firms ability to influence the aggregate demand for the
products in the home and the target market. However, over time the commoditization of
certain complements, erodes the value that customers derive from consuming both
products. Consequently, multi-product firms introduce new complements so as to
maintain high consumer value through their offerings.

Leveraging strategic assets across unrelated businesses

Two types of market power advantage are discerned in the literature (e.g. Berry, 1975;
Montgomery, 1985, 1994; Palich et al., 2000). First, a diversified entitys overall
corporate power may translate into market power in individual product markets.
The superior efficiency of internal factor markets, which explains the aforementioned
corporate power, lies in diversified firms ability to better evaluate tacit know-how and/
or intangible resources. On the other hand, a dominant firm in a particular market may
diversify into new product markets to leverage its market power in its home market to
benefit in target markets. The theorized market power advantage of this type of
unrelated diversification focusses on various anti-competitive or collusive mechanisms
that broadly diversified firms could employ to create or exploit market power
(e.g. Caves, 1981; Sobel, 1984; Saloner, 1987; Bolton and Scharfstein, 1990).
The management literature on diversification, in its reluctance to dabble with the
concept of market power advantage logic of diversification, has ignored an intuitively
appealing theoretical insight concerning unrelated diversification (e.g. Montgomery,
1985, 1994). The ignored theoretical insight is that the ex ante logic of unrelated
diversification is underpinned by both firm- and market-specific characteristics.
The structural characteristics of a firms home- and target-industry influence both its
choice to diversify and the performance implications of the choice to diversify
 (e.g. Berry, 1975; Miller, 2004, 2006). They do so by influencing the diversifying firms Multi-product
assessment of the feasibility of employing a particular anti-competitive mechanism (e.g. corporations
multi-market contact) in that context. However, barring a few exceptions (e.g. Miller,
2006) the management literature on diversification typically ignores the effect of
contextual factors (e.g. Porter, 1987; Dess et al., 1990) in the diversifying firms ability to
leverage their market power into other markets. Needless to say the literature
on product market diversification in management has ignored the role of demand-side 79
characteristics of the home- and target-industries despite exhortations by leading
scholars.

Reconciling the logic of related and unrelated diversification

Although the market power advantage logic of unrelated diversification does not find
much empirical support for its purported explanation of unrelated diversification, it is
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not really inconsistent with the resource-based view of diversification (Montgomery,

1985, 1994). Montgomery (1985) highlights the missing theoretical rationale in the
market power advantage logic and suggests that one should consider the resources
and/or capabilities that explain a firms market power in the first place in its home
industry. She argues that the theorized effectiveness of the collusive mechanisms
employed by the unrelated diversifier actually depends upon the contextual factors,
some of which may be missing in the theoretical explanation, thereby resulting in lack
of empirical evidence when tested with real world data. She argues that broadly
diversified firms may not possess industry-specific or specialized assets required to
address the specific critical success factors of particular target industries and hence are
at a disadvantage vis--vis focussed firms.

Theory: a customer-centric strategic logic of multi-product corporations

A customer-centric logic explains the strategic behavior of multi-product
corporations that diversify away from their home market (for product A) to offer a
portfolio of complementary products (say B, C, D, etc.) to their customer-base of
product A. By definition of demand-side diversification, a multi-product corporation
that serves the two markets necessarily serves an overlapping customer-base for the
two products. First, we conceptually distinguish the customer-centric logic from other
horizontal scope decisions of multi-product corporations (Table I). The latter include
growth strategies that require multi-product firms to: increase product variety in a
particular product market according to a narrow-scope differentiation strategy; enter
new product market segments in the same industry to increase horizontal scope
according to a broad-scope differentiation strategy; or simply cross-sell their products
across customer-types. Second, we explore the profitable applicability of demand-side
strategic assets in terms of the costs of applying these assets to new contexts: adjustment
costs; and opportunity costs. Third, we link the consumer synergies argument (e.g. Ye et
al., 2012) with the anti-competitive explanation of bundling (Nalebuff, 2003, for a
comprehensive review) to explain how the multi-product consumers preferences
influence the strategic behavior of multi-product corporations.

The strategic behavior of multi-product corporations

A distinguishing feature of demand-side diversification is the demand-side outcome
of the diversifying firms strategic choice. The said outcome includes a possible, but
by no means certain, increase in market-size from a pre-diversification SiA to a
 JSMA Strategy
9,1 Multi-variety/
narrow-scope Broad-scope Demand-side
Characteristics differentiation differentiation Cross-selling diversification

Type of Horizontally/ Within-industry Within- or inter- Inter-industry

expansion of vertically industry
diversification to diversification to
80 horizontal differentiated expand product diversification to expand product
scope variants within a scope expand product scope
product category scope
Objective of To offer variety in a To offer a portfolio To offer a portfolio To offer a portfolio
firms single product of products of unrelated or of complementary
horizontal category of a (imperfect complementary products that
scope decision horizontally substitutes) in a products that belong to distinct
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differentiated horizontally belong to distinct industries

industry segmented/ product market
fragmented segments of an
industry industry or even
distinct industries
Distinct/ Products used by different customers Products used by the same customer
overlapping
customer-base
for the
portfolio
products
Demand-side To fill empty To increase market- To increase order- To increase average
implications (adjacent) locations size: Si(H+T) size: Ru(1+2) individual
in a hypothetical SiH (home product Ru1 (users order- consumption: qu(H+T)
multi-dimensional market-segment) size for product 1) qiH (home market
product-attribute +SiT (target product + Ru2 (users order-product A) + qiT
space market-segment) size for product 2) (complementary
product B)
Supply-side Increased supply- Increased supply- The increased The increased
implications side cost of offering side cost of offering supply-side cost of supply-side cost of
a wider variety a wider portfolio selling additional selling
Economies of scale Economies of scale products/services to complementary
and scope in various and scope in various its customer-base products/services to
value chain value chain across N products its customer-base
activities (sourcing, activities (sourcing, (S1, S2, S3, , SN) (SH)
manufacturing, manufacturing, Economies of scope Economies of scope
distribution, selling, distribution, selling, in distribution and in selling legacy
etc.) etc.) selling product A with a
complementary
product B
Typical Market preemption Mutual forbearance Increasing Leveraging market
competitive to deter entry by by introducing customer power in home
Table I. implication rivals products across knowledge by market to gain
The strategic logic of (selective) different product developing advantage in target
multi-product firms segments customer intimacy market

post-diversification SiA + SiB. (SiA refers to the market-size of firm i in market for
product A.) However, by definition the outcome includes an increase in the average
individual consumption (e.g. revenue per customer) by the diversifying
firms customer-base for the legacy product A: from a pre-diversification qiA to a
 post-diversification qiA + qiB. (qiA refers to the average individual consumption of the Multi-product
customer-base of firm i in market for product A.) corporations
The strategic logic of multi-product firm behavior
We impose a definitional restriction that the products in a multi-product corporations
portfolio are necessarily complements in the case of demand-side diversification.
The concept of cross-selling does not impose any such restrictions. In the case of 81
multi-variety firms the portfolio products range from weak to strong substitutes. In the
case of multi-product broad-scope differentiators they are mostly imperfect
substitutes that serve distinct product sub-markets. In the case of demand-side
diversification a common consumer purchases both products in the portfolio
(e.g. computer hardware and computer software), which is similar to the case of
cross-selling. However, in the case of product variety and broad-scope differentiation
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the focal firm does not target the same customer. The customer chooses between the
two substitutes in a portfolio (e.g. a Sedan and an SUV). Hence, one should not confuse
a diversified firm that sells a portfolio of complements (e.g. a videogames company like
Nintendo that sells both console and game titles) with either a multi-variety firm
(e.g. a large specialized or single-brand retailer say Gap) or a broad-scope differentiator
(e.g. a large automobile manufacturer like GM whose products serve different segments
of the automobile industry).
Demand-side diversification vs narrow-scope differentiation. The literature on
product variety explains two main strategic rationale underlying incumbents choice to
invest in product variety (Lancaster, 1990; Carlton and Dana, 2008). First, incumbents
invest in substitutes to increase their overall performance in terms of total revenue and/
or market share. Second, incumbents invest in substitutes to deter entry. However,
incumbents are constrained from offering a large number of variants as doing so may
prevent them from realizing economies of scale in production and marketing. This
product-centric approach to firm behavior involves increasing product variety to fill up
the vacant spots in a hypothetical product attribute space in a product market.
However, this stream of literature on product variety often ignores the strategic role of
complements in increasing a firms product variety due to supply-side constraints and
market-size limitations. While the literature assumes that substitutes are based on a
common or similar technologies, complements are often based on different
technologies.
Demand-side diversification vs broad-scope differentiation. The logic of broad-scope
differentiation manifests itself as within-industry increase of product scope (e.g. Porter,
1980). This type of firm behavior can be understood in terms of the increase in market-
size (S): from a pre-diversification, SH (home market), to a post-diversification SH + ST,
achieved by serving an additional target market (ST). For instance, many consumer
appliances companies (e.g. Maytag) that begin by serving one product sub-market seek
to increase their product scope over time by entering other product sub-markets
(e.g. Collis and Montgomery, 1998/2005). The within-industry diversification behavior
of broad-scope differentiators is primarily governed by the supply-side economies
of sharing strategic assets across the product sub-markets (or segments or categories).
The expanding firm does not seek an overlapping customer-base across the related
markets (home- and target-market) because its decision to actually enter the target
market is driven by supply-side considerations of common manufacturing or
distribution assets.
 JSMA Demand-side diversification vs cross-selling. The concept of cross-selling is a catch-all
9,1 term for a pervasive corporate phenomenon wherein a firm sells its customers of (say)
product A various other related or unrelated products that it produces (e.g. Kamakura,
2007; Li et al., 2010). It does not really have a conceptual underpinning or at least we are
not aware of any theory of cross-selling. A large number of professional services firms
(e.g. consulting, insurance, financial services, etc.) employ cross-selling (e.g. Li et al.,
82 2010). It is widely prevalent as a sales tool in such industries as financial services,
insurance, health care, accounting, telecommunications, airlines, and retailing. For
instance, Wells Fargo is considered as one of the most successful practitioner of the
cross-selling strategy in the financial services sector (Forbes, 2012). Herein, the logic
of cross-selling is to sell as many of the banks products to a particular customer/
household because even with discount bundles the profit per customer increases in the
number of services s/he purchases from a bank. Further, it imposes a great switching
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cost on the customer/household.

Profitable applicability of demand-side strategic assets to new contexts

The literature already considers customer-base as a demand-side strategic resource
(e.g. Barney, 1986; Dierickx and Cool, 1989; Markides and Williams, 1994; Gupta and
Lehmann, 2003, 2006; Zander and Zander, 2005; Gupta, 2009). We build on it further
to conceptualize demand-side competences (e.g. Ratchford, 2001; Adner, 2002;
Adner and Levinthal, 2001; Zander and Zander, 2005; Adner and Zemsky, 2006). We
categorize demand-side competences along two dimensions: knowledge assets
(e.g. customer knowledge), and relational assets (customer relationship). We classify
all demand-side strategic assets into two categories: demand-side strategic resources
(e.g. customer-base); and demand-side competences (e.g. customer knowledge and
customer relationship).
A firms indivisible strategic assets can be profitably applied to new contexts
(product markets) if doing so generates economizing effects and/or value generating
effects or both. On the one hand, shared demand-side strategic assets provide
coherence to multi-product corporations that offer a portfolio of complementary
products (Lev, 2001). On the other hand, applying demand-side strategic assets
(developed in their home-markets) to new contexts would be subject to various
organizational costs: adjustment costs (e.g. Penrose, 1959; Hashai, 2014), and
opportunity costs (e.g. Levinthal and Wu, 2010; Wu, 2013). These costs are in turn
influenced by the two characteristics of the strategic assets described below. Hence,
the applicability of a strategic asset to a new context is constrained by the level of:
specificity of the strategic assets with respect to their origin (e.g. Rumelt, 1974); and
specificity of the strategic assets with respect to their form (e.g. Teece, 1980, 1982). A
customer-centric strategic logic allows multi-product corporations to economize on
their organizational costs to the extent that they can outsource supply-side activities
required to serve the target markets and yet remain profitable.

Context specificity and organizational costs

The outward-looking context-specificity defines the relationship of the focal strategic
asset with the environment in which it originates and/or is deployed by the firm. Either
ends of the continuum of context specificity low or high might be abstract with no
real world examples. A highly context-specific strategic asset cannot be used in contexts
beyond that where it originates (e.g. natural gas extraction capabilities such as hydraulic
 fracturing). On the other hand, low-context specificity or generalizability of a strategic Multi-product
asset implies that it can be deployed in various other contexts (e.g. online retailing corporations
capabilities). Inarguably the demand-side strategic assets (e.g. customer-base or customer
know-how) are characterized by lower context specificity when compared to supply-side
capital stock (e.g. plants and equipment and/or technological capabilities).
Adjustment costs. The adjustment costs incurred by diversifying firms are influenced
by the context specificity of the focal strategic asset. The lower context specificity of 83
demand-side strategic assets (vis--vis supply-side strategic assets) with respect to their
home-markets renders them amenable to being deployed in markets for complementary
products. (However, a high level of context specificity with respect to the geography of
their home market implies that such deployment would be restricted to customers in only
those geographic markets.) Further, the adjustment cost of deploying its demand-side
strategic assets (e.g. customer-base) in new markets for complementary products, which
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are based on entirely different technologies, should be low. By definition,

value-maximizing customers are self-motivated to purchase complements (say B, C, D,
etc.) to the product A. The lower context specificity of demand-side strategic assets also
implies that they can be readjusted faster in dynamic industry conditions:
P1a. Lower context specificity of the demand-side strategic assets translates into
lower adjustment costs.
Content specificity and organizational costs
The inward-looking content-specificity refers to the finite form or structure that
defines the relationship between the constituent elements of the focal capability.
For instance, a particular hospitals capability to perform brain surgery is embodied in
equipment, operated by a team comprising surgeons, anesthesiologists, nurses, and so
on. High content specificity implies that the use of this surgical team in one engagement
restricts their simultaneous use in another (Levinthal and Wu, 2010). Either ends of the
continuum of content specificity might be abstract with no real world examples.
A highly content-specific strategic asset is subject to form limitations or quantity limits
and can either not be allocated simultaneously to produce two distinct goods to be sold
in two distinct markets (e.g. capabilities embodied in personnel skills) or allocated in
fixed units (e.g. manufacturing capacity allocated to different products). On the other
hand, low content specificity implies that the strategic resource is not subject to form
limitations (e.g. customer knowledge) or quantity limits (e.g. brand) and can therefore
be simultaneously allocated to several uses.
Opportunity costs. Levinthal and Wu (2010) and Wu (2013) employ a dichotomy to
categorize diversifying firms capabilities into two types: scale-free capabilities
(e.g. knowledge, reputation, brand name, etc.) and those that are subject to opportunity
costs (e.g. managerial attention, product development teams, etc.). However, the
seemingly contrived dichotomy raises a few questions. If indeed (sic) scale-free
capabilities do exist then do they impose any limits as to the extent of diversification?
It is obvious that any capability that renders itself amenable to being leveraged for
diversifying into new markets would obviously be subject to opportunity costs. Even
brands. Even as we disagree with the contrived dichotomy we provide the missing
theoretical rationale for explaining the variation in the opportunity costs of applying
(sic) non-scale free capabilities to new contexts.
The opportunity costs of applying demand-side strategic assets (developed in the
home-markets) to new contexts are influenced by the content specificity of the focal
 JSMA strategic asset. Let us first illustrate this with a supply-side capability. The brain
9,1 surgery capability of a hospital organization, which Wu (2013) would categorize as
non-scale free, is highly content-specific in terms of its architecture. While it is also
specific to the product-context in terms of the service that can be offered using this
capability (brain surgery) it is less specific to the geographic-context in which the
service can be offered. A slight adjustment cost would allow this team to perform brain
84 surgery in another geographic area. However, it would be subject to high opportunity
cost because the team cannot be at two geographic locations simultaneously.
Let us now understand the same in terms of demand-side strategic assets. The lower
content specificity of demand-side strategic assets (vis--vis supply-side strategic
assets) implies that they can be simultaneously deployed in more than one use.
For instance, a customer-base, which is a demand-side strategic resource, can be used
simultaneously to consume more than one product offered by the focal firm in distinct
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product markets. For instance, Netflixs decision to diversify into the internet-based
streaming video market from the mail-order DVD market was probably influenced
by its confidence in its ability to deploy its customer-base in both markets. We therefore
propose:
P1b. Lower content specificity of the demand-side strategic assets translates into
lower opportunity costs.

Multi-product customers and the strategy of multi-product corporations

A multi-product customer follows his or her purchase of the basic product A with
another purchase of at least one complementary product (say B, C, D, etc.). Even if s/he
does not consume all the complements, s/he likes to retain the choice to purchase all
complements from the same source. First, transaction costs (e.g. search and
negotiation) in the markets for complementary products render it expensive for the
multi-product customer to shop anew every time s/he seeks out a complement
(e.g. Klemperer and Padilla, 1997; Nalebuff and Brandenburger, 1995; Nalebuff, 2003;
Cottrell and Nault, 2004). Second, consumer expectations regarding compatibility of
complementary product (say B, C, D, etc.) with the basic product A imply that s/he
derives more value by purchasing complements from the same supplier (e.g. Spiller and
Zelner, 1997; Priem, 2007; Chatain and Zemsky, 2007; Chatain, 2011).
A forward-looking multi-product customer expects to purchase many complements to
product A over her lifetime of consuming A. S/he economizes on transaction costs and
maximizes her consumption value by being loyal to the focal multi-product corporation.
However, this imposes certain amount of switching costs on the multi-product customer.
This explains their willingness to pay a premium to purchase both A and its complement
B offered by a multi-product corporation. We therefore propose that the forward-looking
behavior of a multi-product customer positively influences the competitive position of a
multi-product corporation in its home- and target market:
P2. A portfolio of complements offered by a multi-product corporation lowers the
multi-product customers willingness to purchase and pay a premium for a
specialized rivals products in the home market as well as the target market for
complementary products.
While consumers value each complementary product differently, they typically reserve
the highest valuation for the basic product A. We argue that even if multi-product
 consumers have the choice to purchase the (lower valuation) complements from Multi-product
elsewhere, they prefer to purchase them from the entity that sells them the basic corporations
product A. For instance, a customer who visits Barnes and Nobles to purchase books
(high-value items) may end up purchasing a coffee (a lower value item) at the on-site
coffee shop and even pay a premium for the coffee. On the other hand, a customer who
visits Starbucks to purchase a coffee (a lower value item) may not really warm up to the
idea of purchasing books (high-value items) at the same location. 85
We now invoke the resource-based view of diversification to explain how the above
described multi-product consumers preferences influence multi-product firm behavior.
A multi-product corporations demand-side strategic assets, which underpin its
dominance in the home market for product A, motivate it to diversify into related target
market(s) for complementary product B. These demand-side strategic assets influence
consumers willingness to purchase and even pay a premium for the complementary
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products offered by the corporation. Given that the consumption value for A is higher
than that for B, we propose:
P3. The likelihood that a corporation offering basic industry product A will
diversify to offer complementary product B will be higher than the likelihood
that a corporation offering complementary product B will diversify to offer the
basic industry product A.
In a dynamic setting, a multi-product corporations choice and effectiveness of offering
a portfolio of complementary products A and B (and C, D, etc.) may be influenced the
evolution of the industry for complementary product B (and C, D, etc.). For instance, the
horizontal fragmentation of the target industry along the product dimension that
manifests as proliferation of within-industry complements to product B (i.e. B1, , Bk)
may prevent diversified firms from capturing economies of scale in advertising/
marketing across different product categories within the target industry. This will
negatively influence the theorized performance benefits of demand-side diversification.
Alternately, the hypothetical value that a multi-product customer derives from
consuming both A and its complement B may decline over time as the market for
complementary product B reaches maturity and the product is commoditized. In such
case, even forward-looking customers may be tempted to switch to a cheaper provider
of complementary product B. However, it may not happen if the multi-product
corporation takes suitable action(s) to satisfy the (switching-cost-imposing) assumption
of forward-looking customers. In a dynamic setting, a multi-product corporation should
continuously introduces new complements (say C, D, E, etc.) to its legacy product
A. This strategic decision influences the competitive environment in its home market as
well as in the target market(s). By doing so it not only increases its average revenue per
customer (and thereby overall revenue) but also stands to increase its profitability
per customer (and thereby overall profits):
P4. The customer-centric logic of strategic behavior of a multi-product corporation
entails that it continuously introduce new complements to its base product A to
maximize its enterprise value.
A multi-product corporation that seeks to create customer value is obviously motivated
to enhance the value of its demand-side strategic assets by leveraging them to enter the
markets for complementary products. (In an empirical paper we explain this
mechanism in terms of the outward shift of the aggregate demand curve for the
complementary products.) However, a multi-product corporation benefits from offering
 JSMA a portfolio of complementary products only if it is able to captures a considerable
9,1 portion of the value it creates for a multi-product customer. How do the shared
demand-side strategic assets of a multi-product corporation allow it to capture the
customer value created for the multi-product customers as enterprise value?
We first invoke the arguments in the bundling literature that explain the
anti-competitive effects of bundling and tying (Nalebuff, 2003, 2004; Carlton and
86 Waldman, 2002, 2010). These effects persist as long as the customer prefers to purchase
the complementary products from a multi-product corporation as opposed to
purchasing them from various specialized sellers. The bargaining power of the multi-
product corporation (say over its technology suppliers) and the horizontal competitive
effects ensure that such corporations not only create value but also capture a
substantial portion of it for themselves as profits.
We now draw attention to the role of demand-side investments and strategic assets
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in creating customer value. (We do so without taking away anything from the
contribution of supply-side investments and strategic assets.) We argue that
the customers preference to purchase all complements from a multi-product
corporation can be understood as an outcome of the latters demand-side
investments (e.g. adverting and marketing expenses). The costs incurred by a
multi-product corporation to acquire and retain customers and to influence them to
consume additional complements contribute to the development and growth of the
corporations demand-side strategic assets. Multi-product corporations that offer a
portfolio of complementary products exploit indirect network effects (e.g. Katz and
Shapiro, 1985; Farrell and Saloner, 1986; Tanriverdi and Lee, 2008). The presence of
demand-side externalities renders their demand-side assets very valuable. Hence, a
multi-product corporations diversification choices based on a customer-centric
strategic logic ensures that their demand-side investments are subject to increasing
returns (e.g. Arthur, 1989). (The returns to a firms investments that exceed its
discounted cost of capital contribute to its enterprise value.) We now arrive at the
central proposition of the customer-centric logic of strategic behavior of a multi-product
corporation:
P5. The increasing returns to demand-side investments in excess of the discounted
cost of capital will be higher (lower) for multi-product corporations that follow a
customer-centric (product-centric) strategy.

Discussions and conclusions

The customer-centric logic of strategic behavior of multi-product corporations
proposed herein contributes to the emerging demand-side perspective within the
strategy literature, in general, and to the two streams of diversification literature that
have evolved in response to the scope and corporate strategy question, respectively,
in particular. First, it bridges the divide between the two streams within the emerging
demand-side perspective one that invokes the value-based strategy to explain how
firms create customer value and compete to appropriate the returns to the value so
created and the other that invokes the RBV to explain that explain the demand-side
drivers. Second, it complements the product-centric logic of supply-side relatedness
featured in the resource-based view of diversification. It takes two to tango the seller
and the buyer. Yet, the product-centric logic of related diversification exclusively
focusses on the diversifying firm and its supply-side strategic assets while ignoring
its demand-side strategic assets and the customers. Third, it serves as the locus for
 a theory of demand-side diversification. This theory explains how the shared demand- Multi-product
side resources (e.g. customer-base) and demand-side competences (e.g. customer corporations
knowledge and customer relationship) positively influence consumers willingness
to purchase and in some cases willingness to pay a premium for the diversified
firms products vis--vis those offered by their single-business rivals. In doing so this
theory not only explains the diversifying firms motivation to leverage demand-side
strategic assets to enter new markets (Manral and Harrigan, 2015) but also the 87
performance benefits of sharing these assets across the portfolio markets (Manral and
Harrigan, 2016).
The proposed customer-centric logic, which underpins the concept of demand-side
relatedness, makes two significant contributions to a theory of demand-side
diversification. First, a more comprehensive concept of relatedness accounts for the
missing supply-side strategic assets across the seemingly unrelated businesses of
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many multi-product corporations. Typically, the businesses in two industries (for

product A and complementary product B) are considered unrelated (when viewed from
the supply-side lens of related diversification) because the technologies required to
produce the products A and B are totally different and they do not share common
production inputs. The portfolios of such multi-product corporations can now be
explained by our theory of demand-side diversification. For instance, over the years
Google has amazed its critics for its seemingly unrelated diversification as it
developed a large array of new products and services to complement its core online
advertising business. These new products and services seem unrelated when viewed
through the extant product-centric and supply-side logic of relatedness. Second, the
concept of demand-side relatedness contributes toward a more stable basis for
determining ex ante relatedness under dynamic industry conditions wherein the
market structure of the multi-product corporations home- and target-markets may be
continuously evolving. The heterogeneous evolution of industrial market structure of
various product markets served by multi-product firms poses a strategic dilemma for
such firms. A product-centric diversification framework characterized by supply-side
relatedness does not resolve the strategic dilemma posed by dynamic industry
conditions. For instance, supply-side strategic assets that may be profitably applicable
in a hypothetical target market at a certain period may not be so in the next period.
It would be presumptuous to assume that two businesses related at a particular time
(say due to common technological inputs) will remain related in the future as well (when
they use different technological inputs). However, the relatedness of two businesses
(e.g. computer hardware and software) defined in terms of common customer-base will
persist even as the products (and their underlying technological architecture) change
from one generation to the next. Further, the adjustment cost of deploying its
customers in new markets for complementary products, which are based on entirely
different technologies, should be low.
The proposed customer-centric logic will expectedly make a significant contribution
to the empirical literature that often struggles with the challenge of a product-centric
diversification framework underpinned by supply-side relatedness: do moderately
diversified firms perform better: because they diversify into related businesses that
require common inputs; or because they share common inputs once they diversify into
related businesses? It has therefore been subject to criticisms that the empirical
exercise is often a post hoc rationalization of certain common characteristics shared by
business units of successful diversified firms. We expect that our theoretical
framework to stimulate empirical inquiry into the role of various types of demand-side
 JSMA strategic assets. To begin with researchers can ex ante identify the properties of
9,1 demand-side strategic assets that either render them more (profitably) applicable
or preclude their (profitable) applicability to novel contexts (e.g. new product- or
geographic- markets). A fertile area of inquiry is to ex ante identify properties
of demand-side strategic assets that render them as better sources of economies of
scope or value generation vis--vis supply-side capital. Another fertile area of inquiry is
88 to ex ante identify the structural conditions under which demand-side strategic assets
are superior (or inferior) to supply-side strategic assets as motivators to diversify.
Yet another fertile area of inquiry is to explain the extent or limits of diversification in
terms of the properties of the demand-side strategic assets identified ex ante. Basically,
are some demand-side strategic assets more widely applicable than others thereby
contributing to a broader scope of firms that possess such strategic assets?
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Corresponding author
Associate Professor Lalit Manral can be contacted at: lmanral@uco.edu

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