The Impact of Diversification on Task Performance: Evidence from Kidney Transplant Centers

Research Summary Even when diversification is beneficial, entry into a new business can negatively affect the performance of the firm's existing business(es). We examine transplant centers that diversified from kidney transplants into liver transplants, focusing on how patient age can affect the costs associated with diversification. We find that diversification into liver transplants resulted in worsened quality performance in kidney transplants for younger patients, whose cases were less likely to be unexpectedly complex. For older patients, whose cases were more likely to have complications, the negative effect of diversification was offset. Our findings suggest that in health care the costs of diversification can be sensitive to patient characteristics, making focused organizations desirable when task complexity is low, while favoring diversified organizations for more complex tasks. Managerial Summary When firms diversify into new activities, the increased coordination may worsen performance in their original, prediversification activities. We show how this change in performance depends on the characteristics of the work itself. We examine kidney transplant centers that diversified into liver transplants. Young patients, who are typically less complex to treat, had worse outcomes when centers diversified. However, for the oldest patients—generally the most complex to treat, with the greatest chance of complications—diversification was associated with slightly improved performance. This suggests that while coordination is difficult, organizations that diversify may be able to acquire coordination skills that can be applied to more complex tasks. Simpler tasks are unlikely to benefit from these skills, and thus we find worsened performance in these tasks after diversification.