Committed Diversification: Why Authenticity Insulates Against Penalties for Diversification

Work in organization theory has highlighted that diversification triggers concerns over the newly diversified firm’s capability or commitment to serve its audience. Although this work has shown that perceived lack of commitment may be an important problem for diversifying firms, it has not been established what might resolve these commitment concerns and reduce demand-side penalties for diversifying to serve new customers. We argue that a firm’s ability to signal authenticity will increase perceptions of commitment and resolve ambiguities about commitment generated by diversification. We use a multimethod approach including qualitative evidence from a case in the behavioral health industry and experimental methods to isolate these observed effects. In a qualitative study, we examine a case in which two firms saw divergent outcomes when they tried to engage in the exact same diversification activity and show that when a firm signals that they are highly authentic (i.e., when stakeholders perceive the firm to be willing to fulfill commitments even while sacrificing short-term rewards), diversification does not threaten perceived commitment. However, those who cannot signal authenticity are less likely to be selected in the market because diversification is seen as a threat to perceived commitment. We then test these findings in two experiments using the primary customer audience, addiction recovery therapists, as participants. In a final experiment, we test some key boundary conditions of our argument, finding support in the context of markets for car mechanics, which suggests that our argument may be applicable more broadly than healthcare into markets for various types of credence goods.