Broadening Focus: Spillovers and the Benefits of Specialization in the Hospital Industry

The long-standing argument that focused operations outperform others stands in contrast to theory and evidence supporting a broader scope for organizations. The literature on related diversification at the level of the firm provides some reconciliation of these conflicting observations by suggesting that multi-unit firms with a portfolio of related businesses outperform both single-unit firms and multi-unit firms composed of unrelated businesses. Explanations for this relationship between focus and firm performance have largely centered on economies of scope achieved by sharing common resources, such as advertising or production capacity. We consider whether there are similar benefits to relatedness at an operating unit level and whether such benefits stem from spillovers between operating activities. Using data from the hospital industry, we first examine the relationship between focus and performance in cardiovascular care. Then, distinguishing between direct and complementary spillovers, we examine: (1) the extent to which a hospital’s specialization in areas related to cardiovascular care directly impacts performance in cardiovascular care (direct spillovers) and (2) whether the marginal benefit of a hospital’s focus in cardiovascular care depends on the degree to which the hospital “co-specializes” in related areas (complementary spillovers). We find evidence of complementarities in specialization between cardiovascular care and related service areas. We thank Carliss Baldwin, Andy King, Gary Pisano, and seminar participants at the Academy of Management and National Bureau of Economic Research for helpful comments. We are grateful to the Division of Research of Harvard Business School for financial support.