Clients and their perceptions can prevent successful diversification

Why is it that some organizations can successfully diversify, while others cannot? Some businesses can increase their complexity by expanding into new markets, creating new products or services for new audiences and succeed, while others seek to do so, and fail.

Ezra Zuckerman, Professor of Technological Innovation, Entrepreneurship, and Strategic Management at MIT Sloan, claims that there are identity-based limits to diversification that have more to do with a client’s perception of the organization than the actual integrity of the services delivered by the organization. In other words, an organization can have superior talent, the best operations, and a delivery of new services or products that is top notch, but if somehow this new direction clashes with a client’s perception of the firm, they may lose the client. These factors should be closely examined prior to a company's diversification. 


Case Study: The Boston Legal Market

Zuckerman puts diversification in the context of the Boston legal market and its most powerful law firms. In “Betrayal as Market Barrier: Identity-Based Limits to Diversification among High-Status Corporate Law Firms," published in the American Journal of Sociology, Zuckerman and his co-authors examine what happens when high-status corporate law firms that diversify into a low-status area of work, such as family law, face a barrier of strong disapproval from existing clients that prevents diversification into another such area, like personal injury law.


“The barrier,” states Zuckerman, “reflects a situation where loyalty norms have been violated, and it surfaces because service to individual plaintiffs is tantamount to betraying the interests of corporate clients.” In his analysis, Zuckerman studied contrasting patterns of diversification among high-status firms in the Boston legal market. The data collected was based on lists of elite Boston law firms from two independent sources, which were then analyzed for the extent of the firms’ diversification into family law and personal injury law.

One of the basic tenets of organizational sociology is that the identity-based limits on a firm’s attempt to diversify are created by their audience’s expectations. A key theme to emerge from this analysis of Boston’s corporate law firms is that corporate clients perceive personal injury law to be an act of profound disloyalty or betrayal on the part of high-status firms, and thus they will not tolerate it, whereas family law is not similarly viewed.

In addition, the law firm interviews indicated that this reaction to personal injury law is not always uniform; it became an issue for clients when personal injury law was perceived to be a threat to the interests of their type of corporation. Clients of high-status firms were more likely to oppose those types of plaintiffs’ side litigation that were directly relevant to their business.

Solving Issues of Perception with Real-Time Feedback

Many times, business leadership cannot clearly see the overall client perception because their vision may be clouded by one or two top clients’ glowing reviews. When seeking to diversify, it would be wise, however to gather real time feedback from clients because, says Zuckerman, “insofar as two audiences have conflicting, rather than merely different, interests, service to a second audience violates a loyalty norm rather than a membership norm and leads to a sharp negative reaction. Just as in the case of ethical norms, the violation of loyalty norms constitutes a betrayal of the audience’s interests and thus cannot be tolerated.”


It is wise, therefore to build a plan to measure client reviews annually across all branches of business service, in order to identify any red flags—and address them immediately.

Ezra Zuckerman

is a Professor of Technological Innovation, Entrepreneurship, and Strategic Management and Chair of the MIT Sloan PhD Program at MIT Sloan and teaches in Developing and Managing a Successful Technology and Product Strategy and the Advanced Management Program at MIT Sloan Executive Education.

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