Received: 15 May 2018 Revised: 15 November 2019 Accepted: 28 November 2019 Published on: 16 January 2020

DOI: 10.1002/sej.1342

RESEARCH ARTICLE

Business model diversification and firm

performance: A demand-side perspective

Timo Sohl1 | Govert Vroom2 | Brian T. McCann3

1
Department of Economics and Business, Univ. Pompeu Fabra (UPF), UPF Barcelona School of Management and Barcelona GSE,
Barcelona, Spain
2
IESE Business School, Strategic Management Department, Barcelona, Spain
3
Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee

Correspondence
Timo Sohl, Univ. Pompeu Fabra (UPF),
Abstract
Department of Economics and Business, UPF Research summary: This study explores the relationship
Barcelona School of Management and
between business model diversification (BMD) and firm per-
Barcelona GSE, C/Ramon Trias Fargas, 25-27,
08005 Barcelona, Spain. formance from a demand-side perspective. We focus on the
Email: timo.sohl@upf.edu addition of a business model with a high degree of demand

Funding information
Agència de Gestió d'Ajuts Universitaris i de
Recerca, Grant/Award Number: 2017 SGR
1244; Ministerio de Economía y
Competitividad, Grant/Award Number:
ECO2017-85763-R
complementarity, which we refer to as demand-related
BMD and explain the ways that such an addition can
increase firm performance. We further extend theoretical
understanding by first providing a comparison of demand-
related BMD to demand-unrelated BMD, describing why
we expect the former to be the more profitable form of
BMD. Second, we contend that the ability to exploit
demand complementarities depends on both demand het-
erogeneity as well as the level of demand for the added
business model. Using a unique panel dataset of global retail
corporations, we find evidence supportive of our
arguments.
Managerial summary: Despite the strong recognition that
many firms operate multiple business models at the same
time, little is known about how business model diversifica-
tion (BMD) may be associated with firm performance. Our
study explores this question from a demand-side perspec-
tive, leading us to distinguish between two BMD strategies:
demand-related BMD and demand-unrelated BMD. We

© 2020 Strategic Management Society

198 wileyonlinelibrary.com/journal/sej Strategic Entrepreneurship Journal. 2020;14:198–223.

SOHL ET AL. 199

argue and show that demand-related BMD increases firm

performance and is more profitable than demand-unrelated
BMD. We also explore external market conditions under
which demand-related BMD should lead to greater perfor-
mance improvements. Our results reveal that demand-related
BMD is more profitable in markets with higher demand
heterogeneity—as fostered by increases in consumer
incomes—and increased technology availability that enables
consumers to act on their heterogenous preferences.

KEYWORDS

business model, demand-side perspective, diversification, firm

performance, retail sector

1 | I N T RO DU CT I O N

The business model has become a topic of increasing interest in the literature on strategic entrepreneurship. This
interest is driven in part by the recognition that the business model—defined as an activity system that connects fac-
tor and product markets—can contribute to the domain of strategic entrepreneurship in at least two important ways
(Demil, Lecocq, Ricart, and Zott, 2015): (a) by integrating strategy research with its focus on value capture and entre-
preneurship research with its focus on value creation, and (b) by suggesting a more central role of the demand side in
the development of theoretical frameworks.
Recently, a growing stream of business model research has begun to devote more attention to the topic of firms that
operate multiple business models at the same time (e.g., Ahuja & Novelli, 2016; Aversa, Furnari, & Haefliger, 2015;
Casadesus-Masanell & Tarzijan, 2012; Casadesus-Masanell & Zhu, 2010; Kim & Min, 2015; Markides, 2013; Markides &
Charitou, 2004; Sabatier, Mangematin, & Rousselle, 2010; Snihur & Tarzijan, 2018), a practice we refer to as “business
model diversification” (BMD). Our aim in this paper is to build upon these early studies that have largely described the phe-
nomenon with anecdotal and case-based evidence. More specifically, our research complements and extends recent work
that has begun to conduct systematic, large-scale examination of how BMD may relate to firm performance. Kim and Min
(2015), for example, examined how the sales revenue of an incumbent may improve from the addition of a new business
model, arguing that whether the two models draw on complementary or conflicting resources is a key consideration.
We contend that a natural extension of existing work focused on supply-side concerns of resource complemen-
tarity is to consider the demand side as well, leading to a more holistic theoretical understanding of business model
diversification. This extension builds links from the business model literature to the rapidly growing and increasingly
influential demand-side literature stream. Building upon the foundation of seminal works, such as Bowman and
Ambrosini (2000), Adner and Levinthal (2001), Priem and Butler (2001), Adner (2002), and Priem (2007), demand-
side research “looks downstream from the focal firm, toward product markets and consumers, rather than upstream,
toward factor markets and producers (Priem, Li, & Carr, 2012: 347).
This extension seems particularly appropriate when examining BMD because of the emphasis on customer-
facing relationships in the business model literature (e.g., Chesbrough & Rosenbloom, 2002; Rietveld, 2018; Teece,
2010). Viewing the BMD phenomenon from the customer perspective is also consistent with research that has
begun to examine how product diversification might involve demand-side synergies associated with increases in con-
sumer willingness to pay—the maximum price a consumer will pay for one unit of a product or service (e.g., Ye,
Priem, & Alshwer, 2012).1
200 SOHL ET AL.

In developing our arguments, we focus on the addition of a business model with a high degree of demand
complementarity; two business models have a high degree of demand complementarity when an individual cus-
tomer receives greater utility from using the business models in combination rather than separately. We refer to
this form of BMD as demand-related BMD and explain the ways that such an addition can increase firm profitabil-
ity via increases in an individual customer's willingness to pay. We further extend theoretical understanding of the
operation of demand complementarities in BMD in two important respects. First, we provide a comparison of
demand-related BMD to demand-unrelated BMD, describing why we expect the former to be the more profitable
form of BMD. Second, we theorize conditions under which demand-related BMD produces more or less benefits.
We contend that the ability to exploit demand complementarities depends on both demand heterogeneity at the
level of individual consumers, as fostered by increases in consumer incomes, as well as increased technology avail-
ability that enables consumers to act on their heterogeneous preferences to use multiple business models in
combination.
We test our ideas utilizing a unique panel dataset of 145 retail corporations from 23 countries across the world
over a 13-year period from 1998 to 2010. We combine information on business models from Planet Retail, one of
the world's leading providers of global retail data, along with performance data (return on assets and return on sales)
from Compustat North America and Global. The retail industry provides a natural setting for our investigation as
prior business model research has suggested a variety of different business models—such as online, discount, and tra-
ditional retailing—are utilized in this industry (e.g., Brea-Solís, Casadesus-Masanell, & Grifell-Tatjé, 2015; Casadesus-
Masanell & Ricart, 2010; Kim & Min, 2015; Raff, 2000; Sohl, Vroom, & Fitza, 2020). Existing research describes the
demand complementarity of online business model additions to traditional store-based models (in our context, tradi-
tional retailers are store-based retailers that are not discounters), as customers may benefit from using both models
in combination (e.g., Ahuja & Novelli, 2016; Amit & Zott, 2001); in contrast, discount business model additions tend
to provide an alternative model that customers perceive as a substitute for the existing model (e.g., Casadesus-
Masanell & Tarzijan, 2012; Christensen & Raynor, 2003).
Our investigation documents substantial activity within each of the business model types with the traditional
model generating the largest amount of revenue; the prevalence of online retailing has notably grown over the
time period of our sample. The data also reveal the pervasiveness of the BMD phenomenon. It has been increasing
over time, resulting in just under 60% of our retail firms operating multiple business models in 2010. Regression
analyses reveal a positive relationship between demand-related BMD and profitability. Our comparison to
demand-unrelated BMD demonstrates that demand-related BMD is indeed the comparatively more profitable
form of BMD. Finally, our moderation analyses indicate that the positive effects of demand-related BMD are
strengthened under conditions of greater demand heterogeneity and increased technology availability that fosters
demand complementarities.
In summary, this research aims to contribute to the growing literature investigating the concurrent operation of
multiple business models. We first describe and document across a worldwide sample of firms over a substantial
number of years an important and increasingly common business phenomenon. Investigation of the BMD phenome-
non is a natural complement to the sizeable literature examining product diversification. While that literature typi-
cally associates performance benefits with the ability to share resources, we argue that demand complementarities
are a particularly relevant source of benefit in business model diversification. In this respect, we extend the demand-
side perspective demonstrating its abilities to provide insights into another phenomenon, namely business model
diversification. Second, our work offers a systematic investigation of how the construct of demand-related BMD is
associated with firm profitability. This is an important contribution in this area as business models address how firms
create and capture value, implying that profitability implications are a fundamental aspect of the concept. Finally, we
also contribute to this emerging literature stream by comparing and contrasting demand-related BMD to demand-
unrelated BMD and by developing theory that begins to establish the boundary conditions of the performance
effects of demand-related BMD.
SOHL ET AL. 201

2 | T H E O R E T I C A L BA C K G R O U N D

The literature on business models has argued that “the business model is a new unit of analysis that is distinct from
the product, firm, industry, or network” (Zott, Amit, & Massa, 2011: 1020). Zott and Amit (2010) describe a business
model as a system of interdependent activities that is centered on a focal firm and spans its boundaries in connecting
factor and product markets. Definitions also share a common view that business models address both value creation
and value capture. As Teece (2010: 172) argues “the essence of a business model is in defining the manner by which
the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to
profits.”
Our focus in this paper concerns the case in which firms diversify by operating multiple business models at the
same time, a phenomenon we label “business model diversification” (BMD).2 This requires firms to concurrently
operate multiple, different activity systems that create and capture value. Prior qualitative work has recognized and
described this phenomenon across a number of different industry settings (e.g., Ahuja & Novelli, 2016; Aversa et al.,
2015; Casadesus-Masanell & Tarzijan, 2012; Markides & Charitou, 2004; Sabatier et al., 2010). In the airline industry,
for example, numerous incumbents added no-frills carrier models next to their existing full-service carrier models
(Markides & Charitou, 2004). Similarly, in the newspaper industry, many firms use ad-sponsored models to offer
newspaper content for free to consumers in parallel to operating subscription-based models (Casadesus-Masanell &
Zhu, 2010). Research in the biopharmaceutical industry describes six distinct types of business models and illustrates
how firms may either focus or diversify across those different types (Sabatier et al., 2010). Finally, retailing compa-
nies, such as Walmart, often operate multiple models including supercenters, discount stores, and e-commerce.3 Our
aim in this paper is to better understand the performance implications of business model diversification.
Drawing on ideas originally proposed by Penrose (1959), resource-based explanations of diversification argue
that firms benefit by utilizing excess resource capacity; applying resources across multiple uses allows the firm to
achieve greater profitability via lower costs from sources such as economies of scope. Some research in the nascent
BMD literature has followed this approach. For example, Kim and Min (2015) argue that whether an incumbent's
existing assets are complementary or conflicting relative to a prospective new business model influences the poten-
tial for the new business model to contribute performance enhancements.
Our study provides a complement and extension to studies such as Kim and Min (2015) that have focused on
the supply side. Because business models emphasize customer-facing relationships (e.g., Ahuja & Novelli, 2016; Che-
sbrough & Rosenbloom, 2002; Rietveld, 2018; Teece, 2010), we anticipate that viewing the phenomenon from a
demand-side perspective offers promise in understanding BMD benefits. Demand-side research represents a grow-
ing literature stream, and it is characterized by several distinct features. Most fundamentally, it focuses on value cre-
ation as determined by consumer willingness to pay (e.g., Bowman & Ambrosini, 2000, Priem, 2001) rather than
potential cost-related benefits as featured in supply-side research. Demand-side research also recognizes the impor-
tant role played by demand heterogeneity among consumers (Adner & Levinthal, 2001), while considering that con-
sumer preferences may change over time. These features lead demand-side research to direct its primary interest to
product markets rather than factor markets, which are typical areas of interest in supply-side research.
Drawing from the demand-side perspective to increase understanding of BMD is also consistent with work in
the product diversification literature that has begun to investigate how product diversification might increase cus-
tomer willingness to pay, leading to demand-side synergies (e.g., Ye et al., 2012). We anticipate that the potential for
the demand-related benefit of higher willingness to pay is a particularly relevant factor in BMD relative to product
diversification. What defines a business model is a system of multiple activities. Engaging in BMD requires simulta-
neous operation of different business models, which means operation of a different combination of activities. In con-
trast, product diversification requires offering different products but not necessarily conducting activities differently.
This suggests that BMD involves differences in a relatively larger set of activities compared to product diversifica-
tion. One consequence of this greater number of differences in activities across models is increased potential for
demand complementarities. The greater number of combinations of customer-facing activities across business
202 SOHL ET AL.

models, such as information provision, product ordering and delivery, reward programs, and after-sales services, the
larger the potential for demand complementarities. In sum, we anticipate that demand-related complementarities for
a particular customer are a key contributor to profitability in BMD. So, as a next step in extending theory in the area
of business model diversification, we focus on the addition of a business model with a high degree of demand com-
plementarity, which we refer to as demand-related BMD and argue that such an addition increases firm profitability.
We develop additional theory to further illuminate the operation and importance of demand complementarities.
First, we compare demand-related BMD to demand-unrelated BMD4 and explain why we anticipate that demand-
related BMD is the more profitable form. Second, we theorize conditions under which demand complementarities
generate the largest benefits. We explain how the relationship between demand-related BMD and performance is
more positive in conditions of greater demand heterogeneity at the level of individual customers and when specific
business model enablers increase demand for the added business model.
Prior to turning to our theoretical development, we offer an important clarification. The below arguments focus
on how BMD relates to changes in customer willingness to pay, holding constant any effects related to either
decreases or increases in costs. Consistent with our focus on the demand side, we do not address resource-sharing
benefits that may lead to lower costs (e.g., Casadesus-Masanell & Tarzijan, 2012), as resource sharing is not a unique
benefit of demand-related BMD. We also abstract away from potential increased costs associated with engaging in
BMD, such as possible conflicts among the activities of multiple business models and increases in managerial com-
plexity (Markides, 2013; Markides & Charitou, 2004), because (a) prior literature suggests these conflicts are compar-
atively small relative to the potential benefits of demand-related BMD (Bustillo & Fowler, 2009; Markides &
Charitou, 2004) and (b) we have no reason to expect that costs associated with demand-related BMD are higher
than costs associated with demand-unrelated BMD.5

3 | T H E O R E T I C A L D E V E L O P M EN T A N D H Y P O T H E S ES

3.1 | Benefits of demand-related BMD

Most definitions of the business model concept take “customers and consumers explicitly into account, for example,
by referring to the customer value proposition” (Demil, Lecocq, Ricart, & Zott, 2015: 4), suggesting that demand fac-
tors may be especially relevant in the context of this form of diversification. Following Rietveld's (2018: 172) obser-
vation that “business models create value when they increase the benefits that consumers perceive from consuming
a firm's products and services,” we anticipate that BMD may increase customer willingness to pay and therefore cre-
ate value. More specifically, we argue that a customer places higher value on the firm's products/services when that
customer can engage with the firm using multiple, different business models. That is, demand complementarities
exist when a particular customer may concurrently use multiple business models offered by the same firm, and these
complementarities lead to higher customer willingness to pay. A particular business model includes specific choices
regarding how to operate customer-facing activities; differences in these activity choices across business models cre-
ates potential for customers to combine their use of those activities to realize greater value. The range of customer-
facing activities included in a business model implies that demand complementarities come in a variety of forms.
First, offering multiple demand-related business models increases customer convenience. In an early discussion of
the complementarity between online and offline business models, Amit and Zott (2001: 505) described how “cus-
tomers who buy products over the Internet value the possibility of getting after-sales service offered through bricks-
and-mortar retail outlets, including the convenience of returning or exchanging merchandise.” For example, Gulati
and Garino (2000: 109) argued that OfficeDepot.com “complements the existing physical stores by providing added
value to the company's 50,000 contract customers—large and midsize corporations that spend a great deal of money
on office products.” Being able to deal with the same firm across multiple demand-related business models also
allows a customer to deepen knowledge specific to that company and its brands. In the context of product
SOHL ET AL. 203

diversification, Priem (2007: 228) refers to this as brand-specific human capital, noting how this means a consumer
“receives unique benefits from that brand, for which the consumer is willing to pay more.” A firm may also provide a
loyalty program that rewards customers for using several of its business models. This fosters higher willingness-to-
pay and increases lock-in (Amit & Zott, 2001) between the customer and firm. Finally, offering multiple business
models to customers who use the multiple models fosters greater customization of offerings based on customer
knowledge gained across the models. For example, a manufacturer such as Apple, Nike, or Nespresso could offer
better product recommendations in its online model based on a customer's purchasing behavior in both the online
and physical stores.
In sum, we anticipate that increases in customer willingness to pay associated with demand-related BMD leads
to a positive performance effect. As such, we predict:

H1: Adding a demand-related business model is positively associated with firm performance.

The above material has focused on the performance implications of demand complementarities in business model
diversification. But firms may also operate additional business models that customers largely view as substitutes
(i.e., demand-unrelated) rather than complements. When a particular customer perceives two business models as substi-
tutes, the customer will not use the models concurrently and demand complementarities do not materialize. Therefore, we
characterize those business models as demand-unrelated. This naturally raises a question about the relative performance
implications of the two BMD strategies. Below, we argue that benefits are stronger for demand-related BMD indicating
that the performance effect of demand-related BMD is higher than the performance effect of demand-unrelated BMD.

3.2 | Comparing demand-related BMD to demand-unrelated BMD

A common factor across the various sources of complementarities in demand-related BMD discussed above is that they
require the firm to be serving a particular customer concurrently with its different business models. Schmidt, Makadok, and
Keil (2016: 871) noted the benefits of serving customers concurrently in their analytical model of product diversification,
adopting the term “customer-specific synergies” to describe these types of synergies that “are only effective when the firm
serves the same customers across product markets.” For example, benefits of firm-specific human capital and loyalty pro-
grams are predicated on serving the same customer across models. Synergies from sharing of brand and customer knowl-
edge rely on the same assumption. The benefits from being able to spend marketing and advertising dollars more
efficiently to build customer willingness to pay requires that firms observe specific customers using multiple models con-
currently to develop superior knowledge about those customers and offer better product recommendations and shopping
experiences. Finally, the convenience of multi-channel shopping is a benefit to customers who shop across multiple chan-
nels. If customers are specific to individual models, there is simply no “multi”-channel benefit. Given the criticality of cus-
tomers' concurrent use of multiple models to these various benefits, they are largely inapplicable in cases of demand-
unrelated BMD. In sum, we contend that demand-related BMD offers greater potential for customer benefits, leading us
to predict that demand-related BMD produces comparatively superior performance outcomes.

H2: Adding a demand-related business model is more positively associated with firm performance than adding a
demand-unrelated business model.

3.3 | Boundary conditions: Variance in demand characteristics

Consistent with our emphasis on the role of the demand side in increasing the performance of business model diver-
sification, we consider how the performance implications of demand-related BMD vary depending on demand
204 SOHL ET AL.

conditions. More specifically, we argue that the nature of demand is a key factor that influences the magnitude of
demand complementarities. Benefits from demand complementarities across business models depend both on the
number of customers able to pursue preference heterogeneity via multiple business models and on changes in cus-
tomer preferences for the use of particular demand-related business models.
[Correction added on 24 January 2020, after first online publication: in section 3.3 title, space has been inserted
between ‘in’ and ‘demand’ so it reads ‘in demand’]

3.3.1 | Demand heterogeneity

Demand (or consumer) heterogeneity represents one of the primary defining characteristics that differentiate
demand-side research (Priem, Butler, & Li, 2013: 478), and it refers to “the presence of consumers with different
needs and requirements” (Adner & Levinthal, 2001: 611). Heterogeneity in preferences gives rise to different market
channels and consumer offerings, and the taste for variety has played an important role in explaining the existence
of product variety and variants within product categories (Lancaster, 1990). And not only do tastes vary in about
what products to buy; they also vary in how to buy them by using different business models. As such, Adner and
Snow (2010) cite heterogeneity in consumer preferences as a critical factor determining whether more than one
offer (or model) can succeed in a particular market. While previous research typically studied demand heterogeneity
at the level of consumer segments (e.g., Adner, 2002) or the level of a firm's potential consumer pool (e.g., Rietveld &
Eggers, 2018), our focus is on-demand heterogeneity at the level of individual consumers.
Previous research focusing on the supply side has argued that “the more heterogeneity there is among inputs, the
more combinations are possible, and the greater the potential there is for complementarities” (Brynjolfsson & Milgrom,
2013: 46). We suggest a similar pattern exists when we focus on the demand side: more heterogeneity in customer
preferences can lead to greater potential for demand complementarities. As explained above, adding a business model
with a complementary value proposition fosters the exploitation of demand-side benefits, as customers have a higher
utility from using multiple business models than from using a single business model to engage with a firm. For example,
the complementarity between Barnes & Noble's online store and its physical stores creates value by offering customers
the opportunity to search and order online, and to receive and return books in physical stores (Amit & Zott, 2001).
While customers with more uniform preferences may focus on using a single business model, customers with
more heterogeneous preferences are more likely to perceive benefits from having the opportunity to use multiple
business models in their interactions with a firm, which should increase their willingness to pay. The above Barnes &
Noble example described preference heterogeneity across two activities, ordering and return, which created an
opportunity to exploit complementarities across those activities. To the extent that demand heterogeneity extends
across additional types of activities, even more opportunities to exploit complementarities arise. Greater demand
heterogeneity in a market (i.e., heterogeneous business model preferences) should therefore create more opportuni-
ties for the successful addition of a demand-related business model. This suggests that performance implications of
demand-related BMD vary with the degree of demand heterogeneity in a marketplace.

H3: Greater demand heterogeneity has a positive moderating effect on the relationship between the addition of a
demand-related business model and firm performance.

3.3.2 | Demand for the added business model

While we considered above how more heterogeneous preferences can create conditions that foster greater demand
complementarities, we also recognize that preferences may change over time. More specifically, we contend that
environmental changes may affect consumer preferences, resulting in increased demand for particular business
SOHL ET AL. 205

models. As such, these changes can lead to greater potential for demand complementarities and therefore larger ben-
efits from demand-related business model diversification.
A variety of environmental changes have the potential to influence preferences for particular business models.
Technological changes affect the ability of firms to combine particular sets of activities within a specific business
model, opening up the possibility of building demand for previously unavailable models. Demographic and cultural
changes, such as aging of a population or the increasing role of women in economic decision making, can create
demand for additional models that provide customers additional options. In the context of the retail industry, envi-
ronmental shifts contribute to changes in shopping patterns, which in turn affect demand for particular business
models aligned with those shopping patterns.
We contend that factors that enable the demand for an emerging business model represent another potentially
important demand-side feature that can affect the benefits of demand-related BMD. Several recent studies have
focused on technological advances in examining changes in demand for business models (see, e.g., Zott et al., 2011).
We also focus on a recent ubiquitous technological driver of such changing preferences, namely the proliferation of
the Internet as a new purchasing channel in many countries.
When technology or other demand-enhancing factors for an emerging business model become more prevalent,
an increasing number of customers develops a preference toward using both the existing and new business model in
their interactions with a firm, such as by using online and offline stores (e.g., Kumar & Venkatesan, 2005). This
implies that available demand-side benefits can be more fully exploited given the higher demand for the complemen-
tary business model that provides additional options to customers. More specifically, firms should be able to exploit
benefits of convenience, loyalty, and customization to a larger extent as the demand for the complementary business
model increases. As a result, we expect that factors that enable customers' usage of an emerging business model
with a complementary value proposition increase the benefits of demand-related BMD.

H4: Greater demand for the added business model has a positive moderating effect on the relationship between
the addition of a demand-related business model and firm performance.

4 | METHODS

4.1 | Data and sample

To test these hypotheses, we faced several challenges in terms of identifying a sample. First, we needed a sample
that provided information about the business models that firms use for their operations, where firms coexist that
focus on a single business model or diversify into demand-related and/or demand-unrelated business models. Sec-
ond, we were also interested in obtaining a cross-country sample of firms to exploit longitudinal differences in
demand heterogeneity and the number of potential users of an added demand-related business model.
Previous product diversification research has typically used industrial segment data from Compustat. However,
the Compustat database does not report information on the business models that firms use for their operations. We
found that the data provided by Planet Retail, a leading private retail research company,6 included the information
required to empirically test our hypotheses in the context of the retail sector. Previous research has used this data-
base to examine topics of diversification in retailing (e.g., Gielens & Dekimpe, 2007). The retailing sector is an appro-
priate setting as prior studies have frequently used examples of retail firms to describe different types of business
models. Specifically, these studies provided several examples suggesting that online (e.g., Amit & Zott, 2001; Kim &
Min, 2015; Zott et al., 2011), discount (e.g., Brea-Solís et al., 2015; Christensen & Raynor, 2003; Magretta, 2002),
and traditional business models (e.g., Casadesus-Masanell & Ricart, 2010; Christensen & Tedlow, 2000; Raff, 2000)
co-exist in retailing, and that an increasing number of retail firms simultaneously operate multiple business models to
address heterogeneous consumer needs. Finally, retailing is an important part of the service sector, where the
206 SOHL ET AL.

leading retail firms originate from countries around the world. In short, we found that retailing is a particularly appro-
priate empirical setting to test our hypotheses.
Based on Planet Retail's worldwide ranking lists of 1997 and 2010, we obtained unbalanced panel data on
300 of the globally largest publicly- and privately-held retail firms. Because Planet Retail does not report information
on return on assets (our dependent variable), we augmented the data with performance information from Compustat
North America and Global. Our matching with the data from Compustat reduced our final sample to 145 publicly-
traded retail corporations, and after lagging of independent variables by 1 year, our sample included 1,183 observa-
tions with an average of eight firm-years for the period from 1998 to 2010.
This sample includes retail incumbents such as US-based Barnes & Noble, CVS, and Harris Teeter, Japan-based
Eon, FamilyMart, and Seven & I Holdings, and China-based Dairy Farm, Gome, and Lianhua Supermarket. The sam-
pled firms originate from 23 countries in different world regions7 and focus their activities on the two-digit industries
of the retail- and wholesale-trade sectors (Standard Industrial Classification [SIC] codes 50–59).8 In sum, the data
obtained includes performance data on the corporate level (from Compustat), as well as revenue data on the more
detailed level of business model for all business models (online, discount, and traditional) that each retail corporation
operates in any given year (from Planet Retail).

4.2 | Describing the phenomenon of business model diversification

In the following, we present information on the sample and general phenomenon of business model diversification.9
Panel A of Table 1 shows that 45% of our firm-year observations are of single-BM firms, 32% added the online BM,
12% added the discount BM, and 11% are of firms that added both the online and discount BM. Panel B of Table 1
reports the relationship between product diversification (operating in multiple industries) and BMD (operating multi-
ple business models). Although there is some correlation, the two are distinct phenomena: multi-industry firms that
operate single models and single-industry firms that operate multiple models represent 26% of our firm-year obser-
vations. Finally, we report how the prevalence of BMD varies across industries within the retail sector. Panel C of
Table 1 shows relatively high levels of BMD in SIC 57 (Home Furniture, Furnishing, and Equipment Stores) and SIC
53 (General Merchandise Stores).
Figure 1 illustrates the development of the different BM combinations reported in Panel A of Table 1 over time.
For each year, these four mutually exclusive BM combinations add up to 100% of our sampled firms. During the
period between 1998 and 2010, the number of single model firms has decreased by about 30 percentage points,
while the largest increase of about 35 percentage points has been seen in the number of firms adding the online
business model next to their traditional model. As a consequence, in 2010 the number of firms that focus only on
their traditional model roughly equaled the number of firms operating both the traditional and online models. The
number of firms that operated the discount model alongside their traditional model decreased over time. Finally, the
number of firms that operate all three business models in parallel (i.e. traditional, online, and discount) increased until
2001 and slightly decreased in 2002, after which it remained relatively stable.

4.3 | Dependent variable

Following previous strategy research on the diversification-performance relationship (see Ahuja & Novelli, 2017;
Palich, Cardinal, & Miller, 2000 for reviews), we use the information on return on assets (ROA) from Compustat as
our measure of firm performance. Because of our international sample where tax requirements differ across firms,
we computed ROA for any given year as a firm's global earnings before interest and taxes (EBIT) expressed as a per-
centage of its total assets. A limitation of using ROA is that this measure does not allow us to separate value creation
SOHL ET AL. 207

TABLE 1 Descriptive analyses

A. Types of business model (BM) additions

Online BM: No Online BM: Yes Total

Discount BM: No 45% 32% 77%
Discount BM: Yes 12% 11% 23%
Total 57% 43% 100%

B. Single and multiple business models vs. single and multiple industries

Single BM Multiple BMs Total

Single industry 27% 8% 35%
Multiple industries 18% 47% 65%
Total 45% 55% 100%

C. Level of business model diversification in different retail sector industries

Avg. % multi-BM Avg. # of BMs

Core SIC of incumbent firm Observations firms per firm
SIC 52 building materials, hardware, garden supply, and 3.8% 16% 1.2
mobile home dealers
SIC 53 general merchandise stores 11.5% 73% 1.8
SIC 54 food stores 55.0% 51% 1.7
SIC 55 automotive dealers and gasoline service stations 1.2% 0% 1
SIC 56 apparel and accessory stores 5.3% 44% 1.4
SIC 57 home furniture, furnishings, and equipment stores 11.4% 77% 1.8
SIC 59 miscellaneous retail 11.8% 31% 1.3
Retail sector (SIC 52–59) 100% 55% 1.7

Notes: N = 1,183. Number of business models (BM) per firm ranges from 1 to 3 (45% of observations are of incumbents
with 1 BM, 44% are of incumbents with 2 BMs, and 11% are of incumbents with 3 BMs).

from value capture, as we describe in more detail in the discussion section. We therefore also perform additional
analyses using ROS and the natural logarithm of a firm's sales as dependent variables.

4.4 | Independent variables

To operationalize our independent variables, we had to distinguish between demand-related and demand-unrelated
business model additions. Previous research suggests that online business model additions can enable firms to create
and exploit demand complementarities because customers may benefit from concurrently using online and offline
business models, whereas discount business model additions provide an alternative model that customers typically
perceive as a substitute for the existing model (e.g., Ahuja & Novelli, 2016; Amit & Zott, 2001; Casadesus-Masanell &
Zhu, 2010; Christensen & Raynor, 2003; Markides & Charitou, 2004).10 Moreover, industry reports suggest that
online BM additions capture demand-related BMD, whereas discount BM additions capture demand-
unrelated BMD.
On the one hand, industry reports show that a large share of consumers buy using both online and offline
models. For example, an international consumer survey reported that in-store and online shopping complement one
another: in-store shopping activity influences almost 50% of online retail sales, and 60% of consumers start
208 SOHL ET AL.

F I G U R E 1 Percentage of firms operating BM combinations over time [Color figure can be viewed at
wileyonlinelibrary.com]

searching for products and services online but prefer buying in physical stores (SapientRazorfish and Salesforce,
2017). Similarly, a US-based consumer survey reported that 66% of consumers who buy online use the physical store
before or after the transaction (Brown, Moriarty, & Mendoza-Pena, 2014). Yet another report states that about 80%
of smartphone users “want to be able to get product information on their phones while they're at the store, and
more than 40% look for deals on products while shopping” (Jacobsen et al., 2017: 10–11). Accordingly, studies have
observed that an increasing number of firms in industries, such as retail, travel, banking, computer hardware, and
software, and manufacturing added online models to their existing offline models to provide their customers with
additional benefits, which should lead to greater loyalty and willingness to pay (e.g., Kumar & Venkatesan, 2005).
On the other hand, industry reports suggest that discount business models provide an alternative to traditional
business models that customers typically perceive as a substitute. For example, a report focusing on grocery retailing
states that “discounters are evolving from stripped-down, no-frills stores to become a genuine alternative for many
consumers” (Jacobsen et al., 2017: 3, emphasis added). This report argues that a key determinant that makes dis-
counters such an attractive alternative is their “winningly simple business model,” which allows discount retailers to
offer consumers similar products at substantially lower prices; as proposed by the report, “when consumers can buy
essentially the same products at a discounter and easily see how much they saved, the challenge for established gro-
cers gets even bigger” (p. 6). The report recommends that a strategic option for traditional retailers is to launch a
spinoff discount model, which should be “clearly separated from the core business” (p. 2); and, that the separation
should be applied to customer-focused functions such as marketing. Similarly, previous research proposed that there
are few demand complementarities between the traditional and discount business models (e.g., Casadesus-
Masanell & Tarzijan, 2012; Christensen & Raynor, 2003; Markides & Charitou, 2004). As just one example, in refer-
ring to LAN Airline's simultaneous operation of full-service and discount (no-frills) carriers, Casadesus-Masanell and
Tarzijan (2012) suggested that the discount and full-service business models are substitutes because there are few
convenience benefits in using both models together.
SOHL ET AL. 209

Based on this literature, we decided to focus on two potential business model additions in our context of retail-
ing: online and discount retailing; allowing us to capture demand-related and demand-unrelated business model addi-
tions, respectively.11 We used dummy variables for online (discount) business model additions that take the value of
“1” for the year in which a firm adds online (discount) retailing and for every year thereafter, and “0” for all other
years. Because adding a business model may not be immediately reflected in a firm's performance, we lagged our
independent variables by 1 year.

4.5 | Moderating variables

To test the moderating effect of demand heterogeneity (Hypothesis H3), we used the natural logarithm of annual
gross domestic product (GDP) per capita to capture demand heterogeneity. GDP per capita is generally considered
an important indicator when assessing country-level variation in average income and standard of living, and differ-
ences in consumer income have been explicitly linked to the presence of demand heterogeneity.12 To test the mod-
erating effect of demand for the added business model (Hypothesis H4), we used annual information on the number
of Internet users per 100 people to capture the potential users of the online business model. We obtained this infor-
mation from the World Bank database.13 So, we used two moderating variables at the country level to examine how
demand characteristics may be associated with variation in performance implications of demand-related business
model additions. We measure these variables for the home country because our sampled firms added online retailing
first in their home country.14 Our sampled retail corporations achieve on average 88.7% of their sales in their home
country.

4.6 | Control variables

By focusing on the more homogenous group of retail corporations, we can exclude several confounding factors aris-
ing from differences in firms' industrial sectors—such as manufacturing and transportation—that are difficult to con-
trol for and can bias estimates of the diversification-performance relationship (Ahuja & Novelli, 2017). To further
reduce potential endogeneity problems arising from omitted variable bias, we included several variables to control
for observable and time-varying differences among our sampled firms. First, a firm's product diversification may be
correlated with its BMD and performance. Therefore, we controlled for product diversification by using the sales-
based entropy index to operationalize a firm's degree of diversification across two-digit SIC industries (Palepu,
1985).15 The entropy index is given by:

X
N
DT = Pi lnð1=Pi Þ ð1Þ
i=1

In Equation (1), Pi = proportion of annual sales of a distinct two-digit SIC industry for a firm with N different
two-digit SIC industries. Because prior research typically found an inverted U-shaped relationship between product
diversification and firm performance (Palich et al., 2000), we control for the linear and squared term of the product
diversification variable.16 Second, although retail firms are typically focused on their home country, several leading
retailers have international operations (Oh, Sohl, & Rugman, 2015). So, we controlled for a retail firm's annual foreign
sales percentage. Third, prior research argued that firm size may be correlated with diversification and performance
(e.g., Montgomery, 1994). Therefore, we controlled for firm size in any given year with the natural logarithm of a
firm's sales. Fourth, since firm growth can affect both diversification and performance (e.g., Ramanujan &
Varadarajan, 1989), we controlled for firm growth with a firm's percentage change in sales over successive years
(i.e., [salest/salest – 1] – 1). Fifth, in addition to firm size and growth, we controlled for firm efficiency by taking the
210 SOHL ET AL.

natural logarithm of a retailer's sales per unit of selling area (Gielens & Dekimpe, 2007). Sixth, the economic environ-
ment in a firm's home country might be correlated with its diversification and performance (Wan & Hoskisson,
2003), so we used country-level GDP growth (income growth) as an additional control variable. We also included
year fixed effects (FE) in our analysis to control for macroeconomic shocks.

4.7 | Statistical method

Our main empirical approach consists of estimating an ordinary least squares (OLS) regression model. Results of the
Hausman test indicated that our predictor variables were correlated with time-invariant firm characteristics,
suggesting that an FE rather than a random-effects model should be used to condition out all time-invariant, firm-
specific features that can affect performance implications of business model diversification.
Although our empirical context focuses on the more homogenous group of retail incumbents, we control for a
battery of time-varying firm- and country-specific characteristics as well as for unobserved time-invariant firm het-
erogeneity (firm FEs) and potential macroeconomic shocks (year effects), and we lagged our independent variables
by 1 year, we thought it prudent to investigate whether any remaining endogeneity might bias our results. Specifi-
cally, it is possible that a firm's BMD is driven by its performance. To further address this concern, we investigated a
two-stage least squares (2SLS) regression model with instrumental variables (IV) to extract the exogenous compo-
nent of online and discount business model additions in assessing their performance implications. As described in
the robustness checks section, this approach produced results consistent with our main analysis.

5 | RESULTS

Table 2 presents descriptive statistics and summarizes the correlations for the variables in our sample. Table 3
reports the coefficients and their standard errors from the FEs model. F-tests for specifications (1) to (4) were signifi-
cant at p < .001.
Specification (1) indicates the direct effect of online business model (BM) addition on firm profitability. Consis-
tent with the findings in the product diversification literature of a positive relationship between related diversifica-
tion and profitability, results show that demand-related (online) BMD is positively associated with firm profitability
(β = .014, p < .05). This finding indicates that, on average, an incumbent's online BM addition is associated with a 1.4
percentage point increase in its ROA,17 which is consistent with the notion of demand complementarities having a
positive effect on firm performance via increased willingness to pay. Thus, our results support Hypothesis 1. More-
over, specification (1) shows an insignificant relationship between discount BM addition and profitability (β = −.009,
p > .10), suggesting that the benefits and costs of demand-unrelated BMD tend to even each other out resulting in a
null-effect. Next, we test Hypothesis 2 using a Wald test for the equality of the estimated coefficients of our online
and discount BM addition variables as reported in specification (1). The F statistic is significant (F = 5.27; p < .05),
indicating that we reject the null hypothesis that the performance effects of online and discount BM additions are
equal. Put differently, results reveal that online BM addition is significantly more positively associated with firm prof-
itability than discount BM addition, providing support for Hypothesis 2.
Specification (2) tests the moderating effect discussed in Hypothesis 3. To facilitate interpretation, we standard-
ized the per capita income variable, and we first consider the conditional main effect. We note that at the mean
value of per capita income, the positive and significant relationship between online BM addition and firm profitability
remains (β = .014, p < .05). Turning to the interaction effect, the coefficient of the online BM addition variable inter-
acted with per capita income is positive and significant (β = .025, p < .001), indicating that per capita income
strengthens the positive relationship between online BM addition and firm profitability. Specifically, when logged
 SOHL ET AL.

TABLE 2 Descriptive statistics and correlations

Mean SD Min Max 1 2 3 4 5 6 7 8 9 10

1. ROA 0.10 0.07 −0.13 0.44 1.00
2. Online BM addition 0.43 0.50 0 1 −0.15 1.00
3. Discount BM addition 0.23 0.42 0 1 −0.05 0.05 1.00
4. Income per capita (ln)a 0.00 1.00 −2.75 1.03 0.13 −0.12 −0.15 1.00
a
5. Internet users 0.00 1.00 −2.45 1.52 0.13 −0.01 −0.13 0.50 1.00
6. Product diversification 0.27 0.32 0.00 1.48 −0.14 0.30 0.23 −0.38 −0.06 1.00
7. Foreign sales percentage 0.11 0.20 0.00 0.89 0.06 0.23 0.15 −0.31 −0.12 0.13 1.00
8. Firm size (ln) 22.52 1.13 18.98 26.48 0.08 0.16 0.28 0.23 0.29 0.09 0.19 1.00
9. Firm growth 0.02 0.68 −0.01 23.40 0.01 0.03 −0.02 −0.02 −0.08 −0.02 −0.02 −0.05 1.00
10. Firm efficiency (ln) 8.35 0.66 6.70 10.67 −0.06 0.25 −0.09 −0.15 0.14 0.13 0.08 0.16 −0.04 1.00
11. Income growth 0.02 0.03 −0.08 0.14 0.00 0.00 0.01 −0.19 −0.45 0.03 0.09 −0.16 0.08 −0.11

Notes: N = 1,183. Correlations above |0.06| are significant at p < .05.

a
Standardized (z-score), see online appendix for detailed information on these two variables.
211
212 SOHL ET AL.

per capita income is one standard deviation above (below) the mean, adding the online BM increases ROA by 3.9
(decreases ROA by 1.1) percentage points. Thus, our results support Hypothesis 3.
Specification (3) tests the moderation effect discussed in Hypothesis 4. Results show that at the mean value of
our standardized number of Internet users variable, the positive and significant relationship between online BM addi-
tion and firm profitability remains (β = .020, p < .001). The coefficient of the online BM addition variable interacted
with number of Internet users is positive and significant (β = .016, p < .001), indicating that the number of potential
users of the online BM strengthens the positive relationship between online BM addition and firm profitability; when
the number of Internet users is one standard deviation above (below) the mean, adding the online BM increases
ROA by 3.6 (0.4) percentage points. Thus, Hypothesis 4 is supported by our results. Finally, the full model is reported
in specification (4), showing that the coefficients of our independent variables remain significant when tested
together.

5.1 | Robustness checks

5.1.1 | Instrumental variable approach

The OLS estimations reported above could potentially reflect endogeneity of the BMD activity. More specifically,
the identification issue arises from the fact that a firm's BMD can be endogenous to its performance. For example,
incumbents that lose market share to online retailers likely feel the need to add the online BM to their portfolio. To
address this concern, we used an IV approach (2SLS regression model). Following Campa and Kedia (2002), we devel-
oped our instruments to capture the overall attractiveness to diversify into online and discount business models
based on particular industry factors. First, we included the mean proportion of online and discount BM additions,
respectively, in a given two-digit retail industry and year. The higher the mean of online and discount BM additions,
the more attractive certain industry factors are for these types of BMD. Our international dataset allowed us to use
the worldwide mean of online and discount BM additions in each industry, limiting the correlation of the instrument
with the error term in the second stage. Second, we used the annual fraction of sales in the firm's two-digit retail
industry accounted for by all other firms that added online and discount business models, respectively (i.e., the
worldwide mean across all countries in our sample). Thus, we used a total of four instruments to predict online BM
addition and discount BM addition in the first stage, and lagged our instruments by 1 year. To estimate the 2SLS
regression model, we used the xtivreg2 command in Stata with firm-FEs to control for unobserved time-invariant firm
heterogeneity, including all other control variables described above. As shown in Table S1 in the online appendix, the
second-stage regression results are similar to our baseline OLS results reported in Table 3.18

5.1.2 | Alternative specifications and variable operationalizations

We also tested the robustness of our results by using alternative specifications of our regressions. First, we repli-
cated our main specifications of Table 3 using ROS as an alternative dependent variable. Results were consistent
when using ROS, providing further support to our conclusions. Second, we performed a 99% winsorization of the
dependent variables ROA and ROS and found consistent results, suggesting that our results are not biased by out-
liers. Third, we used several alternative measures of our moderating variables. As alternative proxies of demand het-
erogeneity (our first moderating variable), we used consumption expenditure, gross national income (GNI), and urban
population percentage from the World Bank database. Moreover, as alternative proxies of demand for the online
BM (our second moderating variable), we used country-level online shopping diffusion (from the Euromonitor Inter-
national database), credit cards in circulation (from the IMD World Competitiveness Online database), and fixed
broadband subscriptions per 100 people (from the World Bank database). Using these alternative measures of
SOHL ET AL. 213

TABLE 3 FE regression results (DV: ROA)

(1) (2) (3) (4)

Online BM addition 0.014* 0.014* 0.020*** 0.018**
(0.006) (0.006) (0.006) (0.006)
Online BM addition × 0.025*** 0.018**
Income per capita (0.005) (0.006)
Online BM addition × 0.016*** 0.009*
Internet users (0.003) (0.004)
Discount BM addition −0.009 −0.008 −0.013† −0.011
(0.007) (0.007) (0.007) (0.007)
Income per capita 0.023 0.002 0.007 −0.001
(0.014) (0.015) (0.015) (0.015)
Internet users −0.002 −0.004 −0.015** −0.011*
(0.005) (0.005) (0.005) (0.005)
Product diversification 0.014 0.012 0.003 0.006
(0.025) (0.024) (0.025) (0.024)
Product diversification2
−0.013 −0.011 −0.013 −0.011
(0.022) (0.021) (0.021) (0.021)
Foreign sales percentage 0.026 0.003 0.015 0.003
(0.023) (0.023) (0.023) (0.023)
Firm size −0.000 0.006 0.008 0.009†
(0.005) (0.005) (0.005) (0.005)
Firm growth 0.004** 0.004** 0.004** 0.004**
(0.001) (0.001) (0.001) (0.001)
Firm efficiency 0.034*** 0.033*** 0.032*** 0.032***
(0.006) (0.006) (0.006) (0.006)
Income growth 0.132 0.121 0.116 0.115
(0.084) (0.083) (0.083) (0.083)
Firm FE Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
†
Constant −0.202 −0.340** −0.373** −0.399***
(0.109) (0.111) (0.114) (0.114)
R-squared 0.11 0.13 0.13 0.14
Observations 1,183 1,183 1,183 1,183
Number of firms 145 145 145 145

Note: The difference in coefficients between online business models (BM) addition and discount BM addition in
specification (1) is significant at p < 0.05. Standardized values (z-scores) for income per capita and internet users per 100
people. Standard errors in parentheses.
***p < .001; **p < .01; *p < .05; †p < 0.10.

demand conditions produced similar results, providing further support for our Hypotheses 3 and 4. Fourth, we used
the natural logarithm of number of stores to proxy for our firm size control variable and found similar results.19 Fifth,
although our sampled firms are all retail corporations, they differ in their focus on food and non-food retailing indus-
tries. To check whether omitting these firm-specific differences could bias our results, we controlled for a firm's sales
214 SOHL ET AL.

percentage of food (relative to non-food) products in any given year. Our results were robust to the inclusion of this
additional control variable. Sixth, although we were interested in examining incumbent retailers' addition of online
and discount models, we recognize that some studies also distinguish between traditional large-store and small-store
retailing as two separate types of traditional business models (e.g., Christensen & Tedlow, 2000). To check whether
differences among incumbents in focusing on traditional large- and small-store retailing influences our results, we
added a variable capturing an incumbent's annual sales percentage in traditional large-store relative to traditional
small-store retailing. Including this control variable did not change our substantive results. Seventh, instead of a firm's
foreign sales percentage, we used the sales-based entropy index (as defined in the description of our product diversi-
fication variable) to control for the firm's degree of diversification across countries and found consistent results.
Eighth, because firms can expand into new business models either organically or through acquisitions, we obtained
annual data from Compustat on changes in firm income due to acquisitions. While including this control variable
reduced our sample to 114 firms and 795 observations, our results remained consistent with those reported in
Table 3. Ninth, the entry of Amazon in an incumbent retailer's home country may be associated with the incumbent's
online business model addition and performance. Specifically, incumbents that lose market share to Amazon in their
country market may be more likely to add online retailing to their portfolio. Thus, we controlled for “Amazon in coun-
try” with a dummy variable that takes the value of “1” for the year Amazon starts to operate a retail website in an
incumbent's home country (e.g., Amazon.cn for China, Amazon.fr for France, or Amazon.de for Germany) and for
every year thereafter, and “0” for all other years. Our results were robust to the inclusion of this additional control
variable. Tenth, all hypotheses continued to receive support (at p < .05) when we also lagged our control variables by
1 year, which reduced our sample by 79 observations. And finally, because the observed performance differences
between online BM additions and discount BM additions could be explained by online being a more profitable busi-
ness model than discount, we used Compustat data on ROA for retailers that focus on online or discount retailing
(418 and 211 firm-year observations, respectively) to assess the relative performance of these two business models.
The data suggest that the online model is not generally more profitable than the discount model: The mean ROA for
online (discount) retailers is −0.08 (0.15) with a SD of 0.26 (0.09). These numbers are also in line with practitioner-
oriented articles proposing that even successful online retailers achieve only thin profit margins (e.g., Rigby, 2014).
As stated by one industry report, “physical retail is notorious for narrow margins, usually in the low-single digits, but
it seems that e-commerce profits are even slimmer, and many online retailers are operating at a loss” (Bowman,
2018). As a result, this robustness check suggests that our regression results are indeed driven by the diversification
benefits of demand-related relative to demand-unrelated BM additions.

5.2 | Supplementary analyses

Our analyses reported above provide evidence supportive of the view that demand-side benefits are a driving mech-
anism of the relationship between demand-related BMD and firm performance. To further illuminate the demand
side as an underlying mechanism, Table 4 reports results of the following two supplementary analyses.

5.2.1 | Sales as dependent variable

In our first supplementary analysis, we used sales as dependent variable to capture consumer perceived benefits
from demand-related BMD, expecting that consumers spend more money on the products of firms that added
demand-related business models compared with single BM firms and firms that added demand-unrelated business
models. So, we used the natural logarithm of a firm's total annual retail sales (from the Planet Retail database) as an
additional dependent variable—noting that sales, the product of price and quantity, is still an imperfect proxy of
demand complementarities associated with higher willingness to pay. Our focus on sales as dependent variable
SOHL ET AL. 215

TABLE 4 FE regression results for supplementary analyses

lnSales ROA

DV (1) (2) (3) (4) (5) (6) (7)

Online BM addition 0.079*** 0.123*** 0.088*** 0.128*** 0.014* 0.020*** 0.018**
(0.023) (0.026) (0.023) (0.025) (0.006) (0.006) (0.006)
Online BM addition × 0.068*** 0.064*** 0.025*** 0.018**
Income per capita (0.016) (0.016) (0.005) (0.006)
Online BM addition × 0.106*** 0.102*** 0.015*** 0.009*
Internet users (0.019) (0.019) (0.004) (0.004)
Discount BM addition −0.018 −0.014 −0.019 −0.016 −0.010 −0.013† −0.016†
(0.028) (0.028) (0.028) (0.028) (0.009) (0.007) (0.009)
Discount BM addition × n/a n/a n/a n/a −0.002 −0.006
Income per capita (0.007) (0.007)
Discount BM addition × n/a n/a n/a n/a 0.003 0.004
Internet users (0.004) (0.004)
Income per capita −0.267*** −0.248*** −0.290*** −0.271*** 0.002 0.005 −0.003
(0.067) (0.067) (0.066) (0.066) (0.015) (0.015) (0.015)
Internet users 0.031† 0.033† −0.027 −0.022 −0.004 −0.016** −0.012*
(0.018) (0.018) (0.020) (0.020) (0.005) (0.005) (0.006)
Product diversification −0.008 −0.020 −0.033 −0.042 0.013 0.003 0.009
(0.108) (0.107) (0.107) (0.107) (0.025) (0.025) (0.025)
Product diversification2 −0.103 −0.118 −0.082 −0.098 −0.012 −0.013 −0.015
(0.095) (0.094) (0.094) (0.094) (0.022) (0.021) (0.022)
Foreign sales 0.301** 0.289** 0.311*** 0.300*** 0.003 0.015 0.003
percentage
(0.091) (0.091) (0.091) (0.091) (0.023) (0.023) (0.023)
Firm size a
0.108*** 0.116*** 0.112*** 0.119*** 0.006 0.008 0.009†
(0.015) (0.015) (0.015) (0.015) (0.005) (0.005) (0.005)
Firm growth n/a n/a n/a n/a 0.004** 0.004** 0.004**
(0.001) (0.001) (0.001)
Firm efficiency 0.11*** 0.124*** 0.117*** 0.123*** 0.033*** 0.033*** 0.033***
(0.026) (0.026) (0.026) (0.025) (0.006) (0.006) (0.006)
Income growth 1.211*** 1.255*** 1.189*** 1.231*** 0.121 0.114 0.113
(0.300) (0.299) (0.298) (0.297) (0.083) (0.083) (0.083)
Lag lnSalest-1 0.819*** 0.820*** 0.813*** 0.814*** n/a n/a n/a
(0.013) (0.013) (0.013) (0.013)
Firm FE Yes Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes Yes
Constant −1.570*** −1.677*** −1.606*** −1.705*** −0.340** −0.381*** −0.411***
(0.253) (0.254) (0.252) (0.252) (0.111) (0.114) (0.114)
R2 0.726 0.728 0.730 0.732 0.133 0.129 0.138
(Continues)
216 SOHL ET AL.

TABLE 4 (Continued)

lnSales ROA

DV (1) (2) (3) (4) (5) (6) (7)

Observations 2,387 2,387 2,387 2,387 1,183 1,183 1,183
Number of firms 285 285 285 285 145 145 145

Note: Standard errors in parentheses.

a
lnStores is used in specifications (1)–(4) to proxy for firm size. The difference in coefficients between online BM addition
and discount BM addition in specification (1) is significant at p < 0.01. Standardized values (z-scores) for income per capita
and internet users per 100 people.
***p < 0.001; **p < 0.01; *p < 0.05; †p < 0.10.

allowed us to use the full sample of privately- and publicly-held firms.20 In addition to the controls from the main
analyses, we also included a 1-year lagged expression of the dependent variable.21 Specification (1) in Table 4 shows
that demand-related (online) BMD is positively associated with sales (β = .079, p < .001), indicating that a retailer's
addition of the online BM increases its sales on average by 7.9%, while the relationship between discount BM addi-
tion and sales is insignificant. The Wald test revealed that online BM addition is significantly more positively associ-
ated with sales than discount BM addition (p < .01). Turning to the interaction effects on sales in specification (2),
the coefficient of the online BM addition variable interacted with per capita income is positive and significant
(β = .068, p < .001), indicating that when logged per capita income is 1 SD above (below) the mean, adding the online
BM increases sales by 19.1% (5.5). Specification (3) shows that the coefficient of the online BM addition variable
interacted with number of Internet users is also positive and significant (β = .106, p < .001), indicating that when the
number of Internet users is 1 SD above (below) the mean, adding the online BM increases sales by 19.4% (decreases
sales by 1.8). Specification (4) reports the full model, showing that all coefficients of our independent variables
remain significant when tested together.

5.2.2 | Interactions with discount business model addition

In our second supplementary analysis, we examined interactions between our two moderating variables (income per
capita and Internet users) with the demand-unrelated (discount) BM addition variable on profitability, expecting that
these interactions would not be significant given the lack of demand-side benefits associated with demand-unrelated
BMD. Indeed, results of specifications (5) to (7) in Table 4 revealed that our moderators were not significant for the
interactions with demand-unrelated (discount) BMD, while they remained positive and significant for the interactions
with demand-related (online) BMD.

6 | DISCUSSION

The business model concept continues to draw increasing interest in both the managerial and academic literature.
The prior business model literature argues that “the business model is a new unit of analysis that is distinct from the
product, firm, industry, or network” (Zott et al., 2011: 1020). We similarly argue that BMD is a conceptually distinct
phenomenon, different from other forms of diversification that have traditionally served as the focus of diversifica-
tion research. Our work builds on prior descriptive and qualitative research of the phenomenon (e.g., Ahuja & Novelli,
2016; Aversa et al., 2015; Casadesus-Masanell & Tarzijan, 2012; Markides & Charitou, 2004; Sabatier et al., 2010;
Snihur & Tarzijan, 2018) to offer a systematic, large-scale examination of how BMD relates to firm performance.
Taken collectively, this growing stream of literature is steadily accumulating a body of evidence related to a relatively
SOHL ET AL. 217

underexplored form of diversification. This suggests clear implications for fundamental questions regarding the scope
of the firm. Cardinal, Miller, and Palich (2011) argued that “Corporate scope comprises three distinct scope ques-
tions: (1) What is our product-market offering? (2) Where are we geographically located? (3) How vertically inte-
grated are we?” Our work suggests that a fourth question addressing BMD is worthy of being asked, namely, “What
business model(s) do we use?”
Our work contributes to and further extends prior business model literature in several noteworthy respects.
First, linking to and drawing inspiration from the fundamental point in the business model literature that customer-
facing relationships are a critical facet of this concept, we focused our examination on potential demand-side
benefits of BMD. This approach complements prior work concerned with supply-side advantages associated with
business model additions (e.g., Kim & Min, 2015). More specifically, our theoretical account emphasized the role of
demand complementarities across business models, and we explained the ways that such demand-related BMD
increases firm profitability via increases in customer willingness to pay. Our work to extend the prior literature
results in a more holistic perspective of the potential benefits of business model diversification. It is also consistent
with the underlying trend in the literature of increasing convergence between demand-side perspectives and busi-
ness model research (Priem, Wenzel, & Koch, 2018). Second, we deepen understanding of how BMD might benefit
firms—first by comparing demand-related and demand-unrelated forms of BMD, and next by theorizing conditions
under which the benefits of demand-related BMD are greater. The effort to begin contextualizing the benefits of
BMD is consistent with the direction in both the product and international diversification literatures; both these liter-
ature streams have followed similar paths in dedicating attention to establishing boundary conditions around the per-
formance implications of diversification.
One of the clear theoretical implications of our work is that relatedness is an important construct in BMD as it is
in product diversification. But our research also indicates meaningful differences. Factors that determine relatedness
differ between the two forms of diversification—relatedness in the product diversification literature is generally asso-
ciated with resource sharing, while business model relatedness is fundamentally associated with demand comple-
mentarities across customer-facing activities. Because business models represent a system of activities, the choice to
operate multiple distinct business models involves conducting a large number of activities in different ways across
those models. Differences in activities across business models creates the potential for demand complementarities
as customers may choose different ways of engaging with the firm. The greater number of activity combinations
across business models, the larger the potential for demand complementarities, suggesting that these demand com-
plementarities play an important role in BMD.
Considering our links to the product and international diversification literature raises an interesting issue for
future research. Our analysis focused on the performance implications of the addition of specific types of business
models (i.e., demand-related and demand-unrelated). Given the large stream of diversification literature in other
areas that examines the relationship between the overall degree of diversification and firm performance, a natural
future question is how the overall degree of BMD may be associated with firm performance. Theory developed in
the context of product diversification suggests that the diversification-performance relationship is an inverted U-
shaped curve; low to moderate degrees of diversification tend to be associated with related diversification and
increasing performance, while moderate to high degrees of diversification are typically associated with unrelated
diversification and decreasing performance. This theorized relationship has received wide support in empirical stud-
ies (Palich et al., 2000). Future research should examine whether this relationship may also be applicable to the BMD
context.

6.1 | Practical implications

Our study emphasizes that consumer preferences are not constrained to preferences about products or services (the
what); customers' preferences regarding the ways to interact with the firm across a variety of activities might also
218 SOHL ET AL.

vary (the how), suggesting that the business model concept can help managers think about preferences more broadly.
But managers have to anticipate how adding business models may affect firm profitability. Our study shows that
adding business models to provide additional options for customers who wish to use multiple models concurrently
creates the potential for exploiting demand complementarities; however, managers should also be cognizant of the
lower potential demand-side benefits associated with adding demand-unrelated models.22
Finally, our results on the boundary conditions of the benefits of demand-related BMD raise practical consider-
ations. Managers should be aware that the benefits of demand-related BMD will depend on the external environ-
ment. For firms operating under conditions of greater demand heterogeneity and stronger demand for the new
business model, our results suggest that adding a demand-related business model will be more profitable. For exam-
ple, consumers may be willing to pay more when they can act on their heterogeneous needs to reduce effort by mak-
ing weekly grocery purchases through their preferred retailer's webpage, while complementing their virtual shopping
trips by going to the retailer's store to buy fresh fruit or milk occasionally. Moreover, industry reports suggest that
more than 50% of Walmart's online sales and around 40% of Best Buy's are picked up in stores (Herring,
Wachinger, & Wigley, 2014), making “click and collect” an attractive purchasing option for which consumers may be
willing to pay more. Such benefits, however, are only available to consumers who can use the Internet to order
online.

6.2 | Limitations and future research questions

Our analysis is not without limitations, although these limitations suggest opportunities for future research in several
instances. First, as with most studies, the conclusions are associated with a particular empirical context. The general
phenomenon of BMD is obviously not limited to the retail sector, so we suggest future research build on our study
by testing BMD in different empirical settings. This will help establish the generalizability of our findings. We also
acknowledge that our sample construction represents another limitation of our study as the sample includes the
300 globally largest retailers, of which (in our main analysis) we used only retailers that are publicly held. Moreover,
in addition to the specific online and discount business model additions identified in our particular context, we hope
that future research will identify and classify relatedness of business models in different contexts, which could even-
tually lead to the development of a business model classification system that parallels the hierarchical structure of
the standard industrial classification (SIC) system.
Second, although our theoretical arguments focused on benefits of increased willingness-to-pay (WTP), we
acknowledge that benefits of reduced costs could also potentially contribute to profitability. Similarly, we acknowl-
edge that BMD is not a costless activity. However, we see no reason to expect that it is costlier to engage in
demand-related BMD than in demand-unrelated BMD because the central issue related to increased costs is poten-
tial conflicts in activities and dominant logics across business models (e.g., Christensen & Raynor, 2003; Markides &
Charitou, 2004). Detailed data on customer WTP would have fostered confirmation of the magnitude of demand
complementarities; however, such information is typically not available in large-scale datasets like ours. In the
absence of such direct measures, we elected to examine the role of demand-side moderators, which were theorized
to positively influence the WTP mechanism to provide insight into whether value creation due to increased WTP
meaningfully contributed to our profitability results. Moreover, we performed two supplementary analyses: (a) we
used sales as dependent variable to examine whether consumers indeed spend more money on firms that diversify
into demand-related models, and (b) we interacted our moderators with demand-unrelated BMD to verify the
absence of demand-side benefits for unrelated BMD. While our moderating and supplementary analyses provided
different pieces of evidence supportive of the view that demand-related BMD can lead to demand complementar-
ities, we see value in additional research to examine the operation of this mechanism more directly. For example,
future research using WTP information following Rietveld's (2018) experimental design in a multi-business model
context would be valuable to further illuminate the exploitation of demand complementarities more directly.
SOHL ET AL. 219

Moreover, additional qualitative research could shed more light on the theoretical mechanisms we explained in our
study. For example, how exactly do firms create and exploit complementarities among demand-related business
models? Do firms experience additional benefits of BMD, above and beyond the ones discussed in our study?
Third, our focus on the WTP benefits of BMD meant that we did not consider how adding a business model
might allow a firm to sell a greater quantity by addressing new customer segments. Adding a discount or online
model might increase the total number of customers even in the absence of changes in consumer WTP. The decision
not to consider such quantity-related issues is consistent with our focus on the demand-side rather than the supply
side, as increases in quantity sold would provide a cost-based benefit to the extent that certain aspects of business
models are fixed costs that can potentially be shared across business models. As noted in the prior paragraph, our
analyses do not rule out the existence of cost benefits and we cannot empirically separate benefits from increased
WTP and quantity sold; however, our results do suggest that demand-side benefits play a role beyond any cost-
related advantages. Future research could complement our work by studying the extent to which adding demand-
related and demand-unrelated business models increase customer count. Despite the strong recognition in the litera-
ture that firms in many industries address different customer segments by using a particular business model for each
one, we still know little about the potential benefits of increasing customer count through business model
diversification.
Finally, as our research represents one of the first efforts to empirically examine the relationship between BMD
and performance, deeper theoretical understanding will also require developing greater knowledge of the boundary
conditions of the primary relationships by identifying additional moderating characteristics. The more mature prod-
uct and international diversification literatures have followed growth paths featuring significant amounts of work
dedicated to investigating such contingencies. Similar work lies ahead for the BMD literature. Overall, such work will
further extend this growing and important research stream that is developing deeper understanding of the perfor-
mance implications associated with the simultaneous operation of multiple business models in one organization.

ACKNOWLEDGEMEN TS
We would like to thank our editor, Henry Sauermann, and our two reviewers for their very constructive and helpful
feedback. We would also like to thank the many colleagues and conference participants who provided valuable feed-
back on earlier versions of the paper. Timo Sohl gratefully acknowledges the financial support of the Spanish Minis-
try of Economy and Competitiveness for the Project ECO2017-85763-R (AEI/FEDER, UE) and Govert Vroom for
the AGAUR grant (Project 2017 SGR 1244) at the Public-Private Sector Research Center at the Universidad de
Navarra-IESE.

ORCID
Timo Sohl https://orcid.org/0000-0002-9200-3529

ENDNOTES
1
In our context of retailing, customers are the end consumer, so we use the two terms interchangeably. In other contexts,
the end consumer may not be the firm's direct customer.
2
BMD is distinct from the concept of business model innovation (BMI), which involves creation of a new business model
via actions such as replacing existing activities with new ones or linking existing activities in new ways. However, BMD
and BMI are not mutually exclusive. For example, situations in which a firm creates a new business model and operates it
alongside the existing one would capture both BMD and BMI.
3
For conceptual clarity, these examples are restricted to firms that operate multiple business models within the same
industry; however, firms may mix both product and business model diversification by deploying different models across
distinct industries.
4
We use the dichotomous terms of “demand-related” and “demand-unrelated” for expositional purposes to characterize
the two ends of a continuum that measures the degree of demand relatedness of BMD.
220 SOHL ET AL.

5
We took a number of steps to ensure that our results reflect demand-related effects. First, we selected moderators
clearly associated with demand-related factors that would have little influence on cost-related effects. Second, as dis-
cussed later, we conducted a number of supplementary empirical analyses to corroborate our conclusions.
6
See http://www1.planetretail.net.
7
Table S2 in the online appendix shows the countries of our sampled retail firms. 48% of the sampled firms originate from
North America, 25% from Asia Pacific, 22% from Europe, 3% from (South) Africa, and 2% from South America.
8
The sampled firms achieve, on average, 98.7% of their sales within the industries of these two sectors of the economy.
9
This information is based on our 145 sampled public firms (1,183 observations). Using the pre-matched sample of private
and public firms (3,202 observations) provides very similar summary statistics, suggesting that the general patterns
described here are similar across private and public firms.
10
As an example, Germany-based “Rewe Group” states on its webpage that most consumers do not know that its tradi-
tional supermarket “Rewe” and its grocery discounter “Penny market” are operated by the same corporate parent, seem-
ingly because the Rewe Group does not create demand complementarities between the two grocery retail chains. In
contrast, the firm created such complementarities between “Rewe” and its online model “Rewe.de,” as customers not
only can obtain information online about new products and promotions in physical stores but also order products online
and pick them up at a physical supermarket with exclusive pick-up parking spaces and checkout services.
11
The Planet Retail database provides annual revenue-based information about our sampled retail firms' operations in the
categories of e-commerce and discount. Planet Retail defines e-commerce (or online retailing) as transactional websites
operated by companies that offer products for home delivery or collection at their outlets. Discount retailing comprises
three categories: (a) discount superstore (large format general merchandise superstore that carries a wide assortment of
non-foods, general merchandise, health & beauty products, and groceries with a strong focus on low prices), (b) discount
store (efficiency-based outlet selling a small number of items in vast quantities, often trading from roughly 1,000 square
meters), and (c) discount variety store (small-format discount stores with a heritage in general merchandise, but increas-
ingly selling ambient groceries, frozen foods and limited fresh foods).
12
Prior work has linked preference heterogeneity to income levels (Adner & Zemsky, 2006; Jackson, 1984) and budget con-
straints (Adner & Snow, 2010). Consistent with this view, Funke and Ruhwedel's (2001) study of 19 OECD countries
from 1989 to 1996 demonstrates a positive relationship between per capita income levels and an index of product vari-
ety. In their seminal marketing textbook, Kotler and Keller (2012) make similar arguments noting that competition in
developing markets takes place at the more basic product level while competition in developed markets takes place at
the “augmented product level,” which adds on additional features, benefits, attributes, and related services to the core
product, reflecting greater demand heterogeneity.
13
Table S2 in the online appendix shows that both moderating variables vary within countries over the time period studied
(1998–2010). Across all countries, the SD of income per capita is 13,478 USD (mean = 40,080 USD) and the SD of num-
ber of Internet users per 100 people is 21 people (mean = 60 people). As reported in the robustness checks section, we
used several alternative proxies of demand heterogeneity (our first moderating variable) and demand enablers for the
online business model (our second moderating variable).
14
Because several retailers added subsequently small operations of online retailing in foreign countries, we controlled for a
retailer's annual foreign sales percentage of online retailing in a robustness check and found very similar results. We also
control for a retailer's annual total foreign sales percentage, as described below in the control variables.
15
As noted above, retail corporations are mainly diversified across the industries comprising the retail- and wholesales-
trade sectors, such as food (SIC 54), apparel (SIC 56), and furniture (SIC 57) retailing.
16
Whether including only the linear term or both the linear and quadratic terms did not affect the substantive results.
17
As a comparison, the sample mean of ROA is 10 % with a standard deviation of 7 % (see Table 2).
18
As reported in Table S1, the F-tests of the first-stage regressions indicated that our instruments are relevant. Moreover,
results of the Sargan tests showed that the exogeneity of our instruments is respected.
19
It is worth noting that Kim and Min (2015) used an incumbent's number of stores as a proxy for conflicting assets in
examining online additions by incumbent retailers. They found a negative interaction effect between online addition and
number of stores on sales performance. In unreported additional analysis, we also interacted number of stores with
online BM addition and were able to replicate Kim and Min's (2015) results by using profitability as dependent variable
and an international sample, contributing to empirical generalization.
20
Using the sample of only publicly-held firms for this supplementary analysis leads to similar results.
21
We also used an Arellano-Bond dynamic panel data (GMM) estimator in a robustness check to address potential bias
from the inclusion of a lagged dependent variable in an FE model (Nickell, 1981). The signs and significance levels of the
SOHL ET AL. 221

GMM regressions were consistent with those obtained with the FE estimation, i.e., all hypotheses were supported at a
level of p < .01.
22
We also note that adding a demand-unrelated (discount) model may increase customer count by addressing different cus-
tomer segments, which can lead to cost-based advantages over single-BM firms that specialize in either traditional or dis-
count business models to the extent that fixed costs can be shared across business models. Our findings suggest,
however, that such potential cost reductions are similar in magnitude to potential cost increases arising from conflicting
activities and dominant logics associated with demand-unrelated BMD, resulting in an insignificant relationship between
demand-unrelated BMD and firm profitability.

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SUPPORTING INFORMATION
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article.

How to cite this article: Sohl T, Vroom G, McCann BT. Business model diversification and firm performance:
A demand-side perspective. Strategic Entrepreneurship Journal. 2020;14:198–223. https://doi.org/10.1002/
sej.1342