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
“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
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.