This article examines the relationship between a firm's strength in product development and its optimal scope. Firms with product development strength have two options: They can leverage it in horizontally related markets, and they can reach into the supply chain to take full advantage of it. The question is how this should be done. One possibility is for the firm to expand its scope, and another is to manage the linkage through contracts. On the basis of the adjustment cost theory of the firm, the author argues that the former solution is more appropriate when product development is fast-paced. This study tests the argument in a sample of several thousand firms and reports four tests. For both types of expansion, the author examines the incidence and the productivity of increased scope. The author uses several measures and finds results that are consistent with the theory.
Managing innovation and the dynamic scope of the firm
