October 03, 2019
New Research From the Tepper School Tests the Limits of Customer Loyalty
Companies that diversify must communicate authenticity and pure intentions, research finds.
Companies looking to expand into new product lines or diversify their business holdings through acquisitions should focus on demonstrating a sincere commitment to their original products in order to avoid customer backlash, according to new research developed at the Tepper School of Business.
The paper, titled “Committed Diversification: Why Authenticity Insulates Against Penalties for Diversification,” was published by Organization Science and coauthored by Oliver Hahl, Assistant Professor of Organizational Behavior and Strategy, and Jaekyung Ha of Emlyon Business School. The paper finds that in order to overcome possible negative perceptions, a company’s desire to grow can be more acceptable among its customers when it shows that it is not driven by profit, but rather by its commitment to creating better products for the customers, with profit simply a byproduct of such a commitment.
“When the customer comes first, the company seems less interested in economic returns,” Hahl explains. “They should show that their focus is beyond simply wringing money from their customers, and instead serving them the best they can. These two types of motivations are often aligned, but when a company grows it raises a tension around which motivation lies behind the growth.”
The research in the study focused on behavioral health care centers that treat substance abuse and was based on a real world case where two identical addiction clinics sought to expand into eating disorders. As health care consolidates, many of these types of clinics have sought to diversify from substance abuse into other areas of treatment (i.e., eating disorders, attachment disorders, PTSD, etc.). To fund this consolidation, some behavioral health companies have been bought by private equity stakeholders. The key finding was when customers saw these PE-backed clinics expanding, they interpreted the reason for growth as simple profit-seeking, which could be at odds with serving clients. By contrast, where PE was behind the scenes or not present, the attempts at growth were seen simply as a means to serve more people. Through experimental manipulation, the researchers show that the difference in inferred motives for growth was driven by whether the clinic was seen as authentic or not – i.e., that they are what they claim to be – and determined whether the diversification was accepted or not.
Beyond health care, authenticity is also important in other growth scenarios, such as a craft brewery being swallowed up by a major beer brand. Hahl says that in such cases, the craft brewer’s original customers tend to disappear because they perceive that the owners sold out their commitment to their niche following in order to turn a profit.
While there are many factors that can determine a firm’s ability to grow, and in some cases capital can assuage many concerns, this research points out that a firm’s identity as authentic or not can open the doors to more successful growth.