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Complementarities and Coordination: Implications for Governance Mode and Performance of Multiproduct Firms

We explore the fit between a firm’s product portfolio strategy and its governance mode with respect to complementary activities that underlie its product offering. We view firm’s governance choice through the lens of orchestrating complementary activities that entail multiple interrelated and often simultaneously occurring transactions. Our key premise is that a broader product portfolio, while offering benefits through the bundle of complementary activities, raises the coordination costs for firms, making integration of complementary activities a preferred mode of governance. We find strong support for our arguments in the context of the U.S. healthcare industry. Hospitals with a narrow service portfolio are more likely to have contracts with physicians as external service providers, and hospitals with a broad service portfolio are more likely to employ their own physicians. Moreover, hospitals that deviate from this fit-based relationship suffer a significant penalty in terms of their financial performa...