Broadening Focus: Spillovers and the Benefits of Specialization in the Hospital Industry
| Published: | May 7, 2009 |
| Paper Released: | April 2009 |
| Authors: | Jonathan R. Clark and Robert S. Huckman |
Executive Summary:
What is the optimal scope of operations for firms? This question has particular relevance for the U.S. hospital industry, because understanding the effects of focus and spillovers might help hospitals determine how they should balance focusing in a single clinical area with building expertise in related areas. While some scholars argue that narrowing an organization's set of activities improves its operational efficiency, others have noted that seemingly unfocused operations perform at a high level and that a broader range of activities may in fact increase firm value. This study by HBS doctoral student Jonathan Clark and professor Robert Huckman highlights the potential role of spillovers—specifically complementary spillovers—in generating benefits from focus at the operating unit level. Key concepts include:
- Hospitals devoting a greater portion of their business to treating patients in related service categories (i.e., those with the potential for knowledge spillovers) experience higher returns to specialization in a focal service.
- Ultimately, these results provide a potential explanation for why there might be decreasing returns to focusing an organization on a single operating activity (or narrow set of activities), especially when it is possible to invest in other activities that complement the organization's area of concentration.
Abstract
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. 41 pages.
