Why Focus? A Study of Intra-Industry Focus Effects

In an intra-industry setting, firm-focus is found to be positively correlated with the ability of firms to produce high-value products, while the overall effect of focus on firm performance is negative due to missed demand externalities generated by a broad product offering. In particular, it is shown that U.S. mutual funds that belong to more focused fund providers outperform similar funds offered by more diversified providers. An explanation based on alignment among a provider's activities is consistent with this result. Cash inflows into fund providersFa measure related to fund provider profitabilityFis, however, negatively correlated with focus in fund offerings. I. INTRODUCTION A CENTRAL ISSUE FACED by every firm is the breadth of its product and business portfolio. Should a firm focus its activities around a set of core products or should it diversify into a broader set of products and businesses? As firms decide on the diversity of their business and product portfolios, two sets of considerations come into play. First, with any product, a firm faces the question whether it is capable of offering this product effectively. Can it produce the product at a quality and cost that will provide a competitive amount of value to customers, while still achieving a profit for the firm? In short, does the firm have the internal capabilities required for offering the products in its product portfolio? Second, if the firm offers more than one product, the firm needs to take into account possible demand interactions among the products it offers. The demand for an individual product offered by a firm may not only be affected by that product's characteristics (e.g., its quality or price) but also by the overall product breadth offered by the firm. For instance, in the presence of 'shopping costs' (Klemperer (1992))Fthe costs of using a number of firms to fulfill the varied demands of a