Can Firms Be Both Broad and Deep? Exploring Interdependencies Between Horizontal and Vertical Firm Scope

Firms can be horizontally diversified, with considerable breadth, or vertically integrated, with great depth. This study explores how breadth and depth affect each other as influenced by capability requirements and coordination demands. Using construction industry data, we assess the interdependence between contractors' portfolios of building types (horizontal scope) and the extent of integration of the activities needed to complete each project (vertical scope). We find that vertical and horizontal scope have a negative interdependency only when contractors face managerial constraints due to coordination challenges. Further, we show that this effect can be mitigated through organizational structures that centralize key functions. Our findings highlight the importance of coordination in the theory of the firm, as we link firm boundaries to managerial coordination and internal organization.

Automated summary

This study examines the interdependence between contractors' horizontal and vertical scopes in the construction industry, finding a negative interaction when facing managerial constraints due to coordination challenges. However, this effect can be mitigated through organizational structures that centralize key functions. The study emphasizes the importance of coordination in firm theory by linking firm boundaries to managerial coordination and internal organization.