ServiceFriday: Diversification – Should Firms Attempt It?

In the service industry, how are some firms able to diversify when they are on the extreme end of the intangibility range? It would seem that the best way to remain successful is to specialize in one service and offer only that. However, recent research has shown a few professional service firms are able to branch out and diversify their brand, and there are certain branding strategies that have been proven to be the most beneficial to this.

In an article published in the Journal of Service Research, Carolina Castaldi and Marco Giarratana analyze brand diversification in the service industry. They write, “The primary sources of a firm’s competitive advantage are intangible, unique, and difficult to imitate resources.” These primary sources serve as knowledge that the firm can provide, and are “embedded in specialized services such as consultancy, usually developed and delivered by highly skilled employees.” In professional service firms, you will typically see “high labor intensity, low capital investment, and customized offerings,” which can be very difficult to diversify.

Service firms are finding that to diversify, they must develop a tangible product to offer to their customers. As information and communication technologies are constantly improving and developing, researches argue that the release of a physical product “should be seen as the release of a software-related product that is coded and reproducible, implying a transition from a labor-intensive offering to a more capital intensive one.” Therefore, a service firm can still specialize in the service they provide, while also offering tangible products to their customers to enhance that service.

Castaldi and Giarratana also examined the best practices for marketing a firm’s brand diversification and found that in order for a professional service firm to successfully diversify, they must fine-tune their branding strategies. They recommend that managers “should focus on their firm’s intangible knowledge stock that could be extended into different service niches by customizing their offer accordingly.” A suggestion they offer is to pull from different teams within a company and combine different combinations of expertise according to the demand requirements. Mergers with other companies may even be beneficial, as it can be difficult to diversify into areas not previously explored by a firm.

Overall, they recommend developing “narrow brands along with diversification, rather than extending consolidated brands when tapping into a new service niche.” This would require coordination between the marketing division and “production” side of a company, “in order to understand the role of brands in a particular niche.” Customers do not react well to change, so it is important to emanate transparency and a sense of security throughout the diversification process.

To read the full article, visit the Journal of Service Research at this link.