Journal of Operations Management 20 (2002) 303–323

Effect of supply chain integration on the relationship between

diversification and performance: evidence from
Japanese and Korean firms
Ram Narasimhan* , Soo Wook Kim
Department of Marketing and Supply Chain Management, Eli Broad Graduate School of Management,
Michigan State University, East Lansing, Michigan, MI 48824, USA

Abstract
Supply chain strategies and practices depend on not only the nature of the business, the competitive environment, and
technological intensity of the product, but also on product and market characteristics. Consequently, supply chain integration
(SCI) strategies should be evaluated in the light of a company’s market and product strategies. This paper examines the effect
of SCI on the relationship between diversification and a firm’s competitive performance. The results of the study can be
useful in integrating supply chain strategy into market and product diversification (PD) strategy. By comparing the main and
interaction effects of SCI and diversification on performance, the paper shows that SCI strategy modifies the relationship
between diversification and performance. Additionally, it is argued that coordinated use of SCI and diversification strategies
has a significant effect on firm performance. © 2002 Elsevier Science B.V. All rights reserved.
Keywords: Supply chain integration strategy; Diversification strategy; Firm performance

1. Introduction competitive advantage within its chosen marketplace

Industry leaders today understand the reality of
competitive differentiation and the vital role it plays
in establishing a long-term leadership position in their
industries. As a result, companies are continually de-
veloping new strategies with the goal of re-inventing
themselves into agile organizations. A major decision
that has to be confronted as part of strategy develop-
ment, is how to pursue diversification-based strate-
gies. A firm can diversify its products, entering either
related or unrelated businesses, and/or it can diver-
sify by pursuing international markets. Once a firm
has diversified, it cannot concern itself only with its
business unit strategy, i.e. how to create a sustainable
∗ Corresponding author. Tel.: +1-417-353-6381.
E-mail address: narasimh@pilot.msu.edu (R. Narasimhan).
(Jones and Swanson, 1995), but must pursue diver-
sification related activities when it confronts greater
competitive pressures (Jacquemin, 1990). Hitt et al.
(1997) assert that, for successful diversification, firms
should have coordination capability for managing
internal diversity and complexity that diversification
creates. This coordination requires significant (in-
ternal) interactions among organizational units that
might be geographically dispersed and external trans-
actions with suppliers and customers. Consequently, a
firm pursuing diversification strategy needs to proac-
tively seek efficient linkage or integration among its
various internal functions, and with its suppliers and
customers comprising its supply chain.
Although untested empirically, literature in strat-
egy and logistics suggests that collaborative supply
chain integration (SCI) such as customer intimacy is

0272-6963/02/$ – see front matter © 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 2 7 2 - 6 9 6 3 ( 0 2 ) 0 0 0 0 8 - 6
304 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
especially important to support corporate strategies
related to differentiation. Supply chain efforts relating
to differentiation include special value-added services
for downstream customers or logistical agility where
service offerings are continuously tailored to unique
and changing key customer requirements. These rep-
resent specific solutions directed at what individual
customers want rather than general solutions reflecting
what the market wants (Morash and Clinton, 1998).
As such, these studies suggest that differentiation,
in future, may become customer specific and may
require SCI related initiatives to support such differ-
entiation strategies.
The focus and thrust of this paper mirrors what
has been said in the literature. The premise of this
paper is that coordination between marketing strate-
gies (diversification) and SCI strategies will lead to
better performance than when the two strategies are
pursued independently. The particular interface be-
tween marketing and manufacturing that this paper
investigates is the interaction effect of diversification
and SCI strategies on firm performance.
It is useful to examine interaction effects of diversi-
fication and SCI since most manufacturing firms are in
fact pursuing both initiatives concurrently. Also, it is
useful to note that the strategy literature has not con-
clusively established a link between diversification-
product and international market diversification
(IMD)- and performance. A plausible explanation for
the inconsistent research findings linking diversifica-
tion and performance may be the failure of these stud-
ies to explicitly address the combined influences of
diversification and other strategic initiatives on perfor-
mance. Although many authors have implied that the
effect of diversification on performance is impacted
by moderating variables, only a few studies have in-
corporated such linkages (Bettis, 1981; Christensen
and Montgomery, 1981). There is no study in the
extant literature in marketing that develops a frame-
work or model that examines the relationships among
diversification strategy, SCI as a moderating variable,
and performance. In short, most empirical studies
have either ignored or failed to fully address how di-
versification strategy affects performance. This paper
posits that SCI moderates the relationship between
diversification and performance, by potentially reduc-
ing the importance of interaction effect between prod-
uct diversification (PD) and IMD on performance.
Although top-level managers are familiar with the
importance of SC integration, they may not clearly
discern how the firm’s SC integration is related to the
firm’s competitive strategy, i.e. market and product-
based diversification strategies. This paper emphasizes
the need for understanding the interaction between
a firm’s SC integration strategy and diversification
(competitive) strategy, and develops a framework
for linking a firm’s SCI strategy to its market/PD
strategy.
The objective of this paper is to examine how the in-
teraction between SCI strategy and competitive strat-
egy impacts performance by considering the following
principal questions: what SCI strategies are compati-
ble with what product/IMD strategies? and are there
synergies that a firm could/must exploit to achieve
higher levels of performance? Addressing these re-
search questions is helpful in identifying how supply
chain management function can play a role in devel-
oping and supporting corporate competitive strategy
to improve organizational performance.
The remainder of the paper is organized as follows.
The next section discusses the literature review leading
to the development of a research model to be tested.
The following section discusses the sampling frame,
measures and data collection. This is followed by a
discussion of the results of model testing. In the final
section we present implications and conclusions.
2. Literature review and model setting
In order to understand and explain the interaction
between SCI and diversification, we utilize the resou-
rce-based view and transaction cost theory, which are
two theoretical domains from strategic management
and organization theory.
Resource-based theory asserts that organizational or
implicit knowledge gained in one business area of the
firm can be transferred to another, and Prahalad and
Hamel (1990) call this a core competency of the firm.
Conner (1991) asserts that resource-based theory can
be linked to transaction cost theory, which suggests
that increasing levels of diversification will increase
the cost of controlling the firm. Jones and Hill (1988)
also show that related diversification, which needs
close communication among various internal or ex-
ternal functions of a firm, will increase management
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
costs more quickly than unrelated diversification,
which requires fewer communications. Therefore,
profits and costs of diversification will vary depend-
ing on the type of diversification strategy imple-
mented. Consequently, the effects of specific diver-
sification types on performance tend to be different
(Geringer et al., 2000). The above argument suggests
that effective and efficient communication and co-
ordination among various functions plays a role in
successful diversification of a firm, thus, implying
the potential importance of SCI. The synergistic re-
lationships between SCI and diversification that stem
from these theoretical perspectives, are more fully
developed in the following arguments. Based on these
arguments, testable hypotheses are suggested.
2.1. Supply chain integration and product
diversification
It has been generally recognized, from a concep-
tual perspective, that increasing levels of diversifica-
tion should have a positive influence on performance
due to economies of scope and scale, market power
effects, risk reduction effects, and learning effects
(Christensen and Montgomery, 1981; Bettis, 1981;
Rumelt, 1974). Diversification can be either related
PD or unrelated PD. For example, a firm that pro-
duces different cameras ranging from digital cameras,
camcorders to simple point and shoot cameras (e.g.
SONY) can be said to pursue related diversification.
Unrelated diversification refers to a firm that pro-
duces and sells products not belonging to the same
product family such as medical imaging equipment,
household appliances, and aircraft engines (e.g. GE).
It is argued in the literature that related PD pro-
vides performance benefit because the different prod-
uct areas can leverage the learning from other areas
(Geringer et al., 2000). In other words, a related-
product diversifier can utilize particular techniques
and learning effects from one business to resolve
problems and exploit opportunities in other businesses
(Qian, 1997). Subsequent studies using Rumelt’s
method (e.g. Geringer et al., 1989; Dubofsky and
Vandarajan, 1987; Christensen and Montgomery,
1981; Bettis, 1981) have generally concluded that
related diversifiers achieved higher performance lev-
els than unrelated diversifiers. Further, the studies of
Itami et al. (1982) and Geringer et al. (2000) using
305
the resource-based view of the firm found that an in-
termediate level of product diversifier such as related
product or dominant-constrained diversifier should
experience performance benefits exceeding that of
lower or higher diversifier suggesting a nonlinear re-
lationship between diversification and performance.
The industrial organization literature (Williamson,
1981; Kay, 1982; Jones and Hill, 1988) also empha-
sizes that synergy effect from diversification among
related businesses can be expected (Qian, 1997). The
resource-based theory of the firm (Conner, 1991),
generally focusing on PD strategies lends support to
these arguments. Leveraging strategic resources and
firm-specific capabilities across product lines should
provide not only economies of scale, but also finan-
cial rewards to related product diversifiers. In other
words, if PD can be pursued within the scope of the
firm’s strategic resources and capabilities, it should
guarantee long term “increasing rents”.
Unrelated diversification produces little synergy.
When a firm pursues diversification with only a frag-
ile link to its major business line, the learning and
resources to guarantee the competitiveness in this new
field can be expected to be insufficient and the diffi-
culty of internal administration tends to increase due
to the lack of economies of scope. Many of the most
impressive failures of diversification can be traced
to a failure to establish relatedness among various
business lines at the corporate level (Grant, 1988).
In general, unrelated diversifiers must overcome the
challenge posed by the lack of economies of scope
and complexity of internal administration to realize
performance benefits. It may be possible for unrelated
diversified firms to achieve high levels of performance
if they disperse the risks from internal diversity and
complexity stemming from unrelated diversification
strategy, through effective and efficient interaction
and coordination among various functional units
within the firm. Thus, a company’s attempt to achieve
internal integration across production, logistics, and
marketing may have a significant role in influencing
the (potential) positive relationship between unrelated
diversification and performance.
Based on the above discussion, it can be stated that
diversification should lead to sustainable economic
benefits, and that there exists a nonlinear, inverted
U-shaped relationship between PD and performance
(Itami et al., 1982; Geringer et al., 2000).
306 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
Fig. 1. Hypothesized effect of supply chain integration.
The resource-based and transaction cost theories
also suggest that PD might have a curvilinear rela-
tionship with performance, which indicates positive
relationship if product scope is within given strategic
resources and capabilities, but negative relationship
if product scope exceeds the range of rent-yielding
resources, and governance scope surpasses manage-
ment capabilities (Tallman and Li, 1996). Acquiring
economies of such governance scope may require
mechanisms to secure efficient operating relationships
among related functional areas in diversified firms,
and new organizational forms. It can be expected
that accomplishment of internal integration across the
supply chain could lead to the adoption of new orga-
nizational forms and operating relationships, perhaps
based on a higher level of information integration and
use across the internal value chain of the firm. This in
turn can be expected to increase the firm’s strategic
capabilities and extend the economies of scope, thus,
facilitating the firm’s diversification efforts. These
arguments suggest the following hypotheses.
Hypothesis 1. The relationship between PD and per-
formance is curvilinear.
Hypothesis 1a. Internal integration across the supply
chain positively moderates the curvilinear relationship
between PD and performance.
The implication of these hypotheses and subsequent
ones are shown on Fig. 1 as a movement to the right
and upward of the response curves linking perfor-
mance and diversification.
2.2. Supply chain integration and international
market diversification
A broad geographic scope of operation may raise
a firm’s capability to share or coordinate its interna-
tional activities, because the similarity among coun-
tries in terms of infrastructure, distribution channels,
and marketing is growing, and also, easier coordi-
nation of activities among different countries is fa-
cilitated by advanced technologies. Such capabilities
include economies of scale and knowledge from the
experience of managing the diversity of operations
stemming from internalization. IMD also provides the
chance to exploit economies of scale within a firm
(Qian, 1997).
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
However, managing IMD is a very complicated
and difficult job (Roth, 1992; Roth et al., 1991). Lo-
gistical costs, trade barriers, and cultural diversity
make management of internationally diversified firms
highly complicated (Hitt et al., 1997), and further,
strong institutional and cultural barriers prevent the
transfer of competitive advantages across countries
(Kogut, 1985). Also, the differences in cost system
across countries considerably increase the risks re-
lated to resource allocation decisions across a firm’s
various product markets. These risks are directly re-
lated to high transaction costs including coordination,
distribution, and management costs. In order to make
decisions effectively, it is necessary to control a lot
of complicated transaction factors, allocate resources,
and reduce transaction costs. Proper management of
significant amounts of information and considerable
coordination with internal managers in geographi-
cally diverse units and with external members such
as government agencies, suppliers, and customers are
also required. In particular, information-processing
demands are more complex and greater when firms
move into new international markets than when they
move into different product markets within the same
domestic setting (Hitt et al., 1997). The above ar-
guments suggest that there may be good reasons to
speculate that perhaps moderate levels of IMD would
result in benefits to a firm. This possibility was sug-
gested by Geringer et al. (1989). The authors failed
to show a positive relationship between IMD and
performance that they had posited. However, recog-
nizing the possibility of a non-linear relationship,
Geringer et al. carried out post hoc analysis of their
data. Through these post hoc tests, they suggested that
IMD has a nonlinear inverted U-shaped relationship
with performance. Also, Geringer et al., commented
that there might be a critical threshold for IMD that
“would portend potentially significant ramifications
for management of multinational enterprises”.
The complex information processing demands from
IMD must be dealt with effectively. Considerable co-
ordination on trade barriers, logistical costs, cultural
diversity, and various country differences is required
to enjoy the benefits of differences in costs and
economies of scope that IMD offers. This coordina-
tion demands significant numbers of both internal and
external transactions with suppliers and customers
in geographically dispersed markets. Particularly
307
important are efficient external interactions with sup-
pliers and customers in international markets since
they contribute to the development of organizational
skills needed for managing IMD. The validity of this
argument is also supported by market separation the-
ory in economics, which claims that a company can
maximize performance by selling its existing or new
products in different markets, if it establishes a high
level of linkage with suppliers and customers that
makes efficient market separation possible. All of the
above arguments emphasize that external integration
with suppliers and customers is necessary for success-
ful IMD, and such external integration should extend
the point of diminishing returns from IMD over time,
thus, leading to the following hypotheses.
Hypothesis 2. The relationship between IMD and
performance is curvilinear.
Hypothesis 2a. External integration with suppliers
positively moderates the curvilinear relationship be-
tween IMD and performance.
Hypothesis 2b. External integration with customers
positively moderates the curvilinear relationship be-
tween IMD and performance.
2.3. Supply chain integration and the interaction of
product and international market diversification
2.3.1. Interaction of product and international
market diversification
Organizational learning theory proposes that man-
agerial capabilities developed from the experience of
implementing PD enable firms to effectively control
the threats associated with IMD (Hitt et al., 1997).
Firms with moderate scope such as dominant-business
and related-constrained firms should have higher per-
formance by exploiting the latent synergies among
their related businesses. The combination of product
and IMD accelerates the achievement of such latent
synergies by enabling firms to develop interdepen-
dencies across their businesses using the structures
and capabilities generated in implementing PD strate-
gies. Also, such firms have a better chance to achieve
economies of scale and scope. Kim et al. (1989) sug-
gest that the integration of related product and IMD
strategies makes it possible to gain profit stability.
308 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
However, Kim et al., found that the integration of
unrelated-product and IMD strategies can also bring
profit growth, because internationally diversified,
unrelated-product diversifiers can effectively disperse
the risks of serious losses and increase positive bene-
fits. Firms in international markets can enjoy unique
and inimitable synergies beyond simply financial
benefits. This is because firms that are simultane-
ously pursuing PD and IMD can leverage different
resources in different business units, and such lever-
aging enables a firm to get economies of scale and
scope more than gained by either product or IMD
alone (Harrison et al., 1991).
These arguments imply an interaction effect of PD
and IMD on performance, and thus, international di-
versifiers with relatively high level of PD would get
higher performance than those with relatively low
level of PD. The same point is made by Bartlett and
Ghoshal (1989), in their assertion that high levels
of PD and IMD enable firms to gain a transnational
capability that simultaneously results in international
coordination and domestic agility. Consequently, it
can be argued that the interaction of PD and IMD
should extend the point of diminishing returns in
the curvilinear relationship between diversification
and performance upward and to the right, because of
efficient structure, better governance, and enhanced
managerial capabilities (Hitt et al., 1997).
2.3.2. Substitution role of supply chain integration
It may be difficult to implement IMD in single busi-
ness (non-product-diversified) firms. In these firms,
managers do not have adequate experience control-
ling internal diversity and the complexity stemming
from IMD. Thus, the knowledge and preparation
required for the successful pursuit of IMD may be
insufficient, and this might be due to the difficulty in
acquiring key capabilities and developing organiza-
tional structures suitable for effectively managing the
information-processing demands. This underscores
the significance of managerial and organizational
learning for diversification.
Insufficiency of experience in managing diversity
and complexity associated with IMD in single busi-
ness firms can be mitigated somewhat by effective
interaction with external suppliers and customers. The
cooperation with suppliers who have considerable ex-
perience with diversification, can provide a firm with
an opportunity for the systematic learning of man-
agerial and organizational skills needed to prepare for
managing IMD. Also, high level of linkage with sup-
pliers and customers enables firms to effectively dis-
perse the risks of (product and market) diversity and
complexity and to achieve effective market develop-
ment through efficient market separation. Therefore,
systematic integration with external suppliers and cus-
tomers may make it possible even for single business
firms to capture the benefits of IMD. This suggests
that in the case of firms, which have high degree of ex-
ternal integration with suppliers and customers, IMD
may have a positive effect on firm performance regard-
less of the level of PD. In other words, the level of PD
may not have a significant influence on the relation-
ship between IMD and firm performance. This implies
that external integration with suppliers and customers
may substitute for the role of PD as a positive mod-
erator on the curvilinear relationship between IMD
and firm performance. Thus, the interaction effect of
PD and IMD may be insignificant, as the level of SCI
increases.
The substitution role of SCI can also be found in
the interaction between unrelated PD and IMD. As
discussed previously, even though unrelated PD may
have a weak positive relationship with performance,
unrelated diversifiers with high IMD can achieve high
positive returns, if they can develop the experience and
the skills to manage internal diversity and complexity
as well as acquire inimitable complementarities be-
tween different resources in separate business units.
The capability to manage internal diversity and com-
plexity is a benefit that can be expected from internal
integration across the supply chain. This means that in
the case of firms that have high degree of internal in-
tegration across the supply chain, PD may have a pos-
itive effect on firm performance regardless of the level
of IMD. In other words, unrelated product diversifiers
with high degree of internal integration can realize
positive performance effects even though they might
pursue a market penetration strategy focusing only on
their domestic markets. This implies that internal inte-
gration across the supply chain may substitute for the
role of IMD as a positive moderator on the curvilinear
relationship between PD and firm performance, thus
supporting the argument that the interaction effect of
PD and IMD may be insignificant, as the level of SCI
increases. Thus, we suggest the following hypotheses.
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
Fig. 2. Research model.
Hypothesis 3. The interaction of PD and IMD has a
significant effect on performance. PD positively mod-
erates the curvilinear relationship between IMD and
performance. IMD positively moderates the curvilin-
ear relationship between PD and performance.
Hypothesis 3a. The moderating effect of IMD on the
curvilinear relationship between PD and performance
is insignificant, as the level of internal integration
across the supply chain increases.
Hypothesis 3b. The moderating effect of PD on
the curvilinear relationship between IMD and per-
formance is insignificant, as the level of external
integration with suppliers increases.
Hypothesis 3c. The moderating effect of PD on
the curvilinear relationship between IMD and per-
formance is insignificant, as the level of external
integration with customers increases.
Fig. 2 shows a research model that embodies the
basic premises of this research.
309
3. Methodology
3.1. Sampling
Consistent with the purpose of this study, target
corporations to be sampled were manufacturing cor-
porations carrying out all the value chain activities in
a supply chain. The data were collected through ques-
tionnaires sent to supply chain managers or top-level
executives in large manufacturing corporations among
Korea’s listed and registered corporations and Japan’s
major national logistics professional association
members. The questionnaires were administered by
individual visit, or sent by fax, and mail for the Ko-
rean firms, and by fax and mail using the countrywide
mailing list rosters of the association for Japanese
firms. The respondents were either supply chain man-
agers, or in cases where the firm did not have a supply
chain management function, a top-level executive of
sales, production, or planning department who was
well acquainted with supply chain policies and cor-
porate strategy of the firm. In order to raise the relia-
bility of measurement, respondents were requested to
310 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
Table 1
Sample characteristics
Type of industry
Consumer products
industrya
Korea
No. of firms 99 (40.7% )
Mean sales 342 million US$
Mean asset 428 million US$
Japan
No. of firms 137 (36.1%)
Mean sales 958 million US$
Mean asset 1198 million US$
a
Consumer product industry: food processing, sweetmeats, pharmaceuticals, footwear, clothes, wood, furniture.
b
Basic industrial material industry: textile, organic chemical, inorganic chemical, petrochemical, cement, paper, tire, fertilizer, fabric,
pulp, metal.
c Electronics and machinery industry: computer, home appliances, communication equipment, electronic parts, automobile, automobile
parts, machinery.
consult with others in SCM department or functional
executives as appropriate when answering questions.
The reliability of responses on objective measures
was confirmed through comparison with data col-
lected from annual reports of the companies. A total
of 668 completed responses (Korea-265, Japan-403)
were returned, and of these 668 responses, 45 incom-
plete responses (Korea-21, Japan-24) were discarded.
Accordingly, the analysis that follows and all reported
statistics were based on a sample of 623 manufac-
turing organizations (Korea-244, Japan-379). Table 1
summarizes the sample characteristics for each coun-
try according to industry type and size. As can be seen
in Table 1, the sample firms in this study encompass
a diversity of industry types and sizes. The results of
difference test between Korean firms and Japanese
firms show that there is a significant difference be-
tween two countries for size measured as sales (t =
3.54,P < 0.05) and as assets (t = 2.93,P < 0.05).
This means that size effect on the proposed model can
be considered by the separate analysis on the samples
of two countries. The diversity of the sample should
strengthen the external validity of this study’s results.
3.2. Research variables and measurements
3.2.1. Level of SCI
We consider three integration levels-a company’s
integration with suppliers, internal integration across
Overall
Basic industrial Electronic and
material industryb machinery industryc
81 (33.1% ) 64 (26.2% ) 244
560 744 520
775 963 684
73 (19.3%) 169 (44.6%) 379
1290 1522 1273
1609 2137 1696
the supply chain, and a company’s integration with
customers-for classifying the type of SCI strategy pur-
sued by a firm.
To measure these three integration levels, a total
of 21 items were used (see Table 2) including six
items for a company’s integration with suppliers (IS)
(Stevens, 1989; Monczka and Morgan, 1996; Carter
and Narasimhan, 1996; Narasimhan and Carter, 1998;
Zaheer et al., 1998; Tan et al., 1998; Carr and Pearson,
1999), eight items for internal integration across
the supply chain (II) (Stevens, 1989; Carter and
Narasimhan, 1996; Narasimhan and Carter, 1998;
Birou et al., 1998; Wisner and Stanley, 1999), and
seven items for a company’s integration with cus-
tomers (IC) (Champa and Long, 1989; Stevens, 1989;
Morash et al., 1996, 1997; Feitzinger and Lee, 1997;
Moore, 1998; Zaheer et al., 1998; Tan et al.,
1998; Wisner and Stanley, 1999). The measurement
scales in the survey used a seven point Likert scales,
with “Extremely Low” and “Extremely High” repre-
senting the end points of the scales.
3.2.2. Level of IMD/PD
The level of IMD and PD was used to define the
diversification strategy of firms.
Previous studies (Sambharya, 1995; Geyikdagi and
Geyikdagi, 1996; Hitt et al., 1997; Qian, 1997;
Geringer et al., 2000) have shown that the level of
IMD may be used as an indicator of IMD. This study
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323 311

Table 2
Measurement items and method
Research variable Measurement items Method

Supply chain Company’s integration with suppliers Seven point Likert

integration Information exchange with suppliers through information technology scales (extremely
The level of strategic partnership with suppliers low–extremely high)
The participation level of suppliers in the design stage
The participation level of suppliers in the process of procurement and production
The establishment of quick ordering system
Stable procurement through network
Internal integration across the supply chain
Data integration among internal functions through information network
System-wide information system integration among internal functions
Real-time searching of the level of inventory
Real-time searching of logistics-related operating data
Data integration in production process
Integrative inventory management
The construction of system-wide interaction system between production and sales
The utilization of periodic interdepartmental meetings among internal function
Company’s integration with customers
Follow-up with customers for feedback
The level of computerization for customer ordering
The level of organic linkage with customers through information network
The level of sharing on market information
The agility of ordering process
The frequency of periodical contacts with customers
The level of communication with customers
Diversification International market diversification Actual data
The firm’s number of subsidiaries by country or region
The firm’s total number of foreign subsidiaries
Product diversification Actual data
The sales of a firm’s each business unit
The total sales of a firm
The level of relation between main business unit and each Five point Likert
of other business units in the respect of scales
marketing/channel and product/technology
Firm performance Sales growth and market share growth Actual data
The growth ratio of the current level to three years ago
Profitability Seven point Likert
scales
Return on investment, return on assets, revenue
growth, financial liquidity, and net profit

employed two entropy measures (Ramaswamy et al.,
1996; Hitt et al., 1997; Qian, 1997; Geringer et al.,
2000) for measurement of IMD level; one for the cal-
culation of a firm’s foreign sales ratio, and the other
for the calculation of a firm’s foreign holding com-
pany ratio. In order to use entropy measures, we col-
lected actual data on a firm’s foreign sales including
export sales by country or region and a firm’s number
of subsidiaries by country or region along with the
firm’s total sales and the firm’s total number of foreign
subsidiaries. The entropy measure for a firm’s foreign
sales is defined as D = i [Pi × ln(1/Pi )], where Pi
is the proportion of sales attributed to global market
region i, and ln(1/Pi ) the weight given to each global
market region, or the natural logarithm of the inverse
of its sales. This measure was developed and used by
312 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
Kim et al. (1989, 1993). The measure considers both
the number of global market regions in which a firm
operates and the relative importance of each global
market region to total sales (Hitt et al., 1997). The
entropy measure for a firm’s foreign holding com-
pany is defined as D = Si /loge (1/Si ), where Si is
the ratio of a firm’s holdings (number of subsidiaries)
in a country or region i to the total number of foreign
subsidiaries (Qian, 1997).
This study employed the entropy measure of PD in
order to identify the level of relatedness among differ-
ent product parts (Jacquemin and Berry, 1979). The
entropy measure of PD is defined as PD = i [Pi ×
ln(1/Pi )], where Pi is the proportion of sales attributed
to part i and ln(1/Pi ) is the weight given to each part,
or the natural logarithm of the inverse of its sales. The
measure considers both the number of parts in which
a firm works and the proportion of total sales each part
presents (Hitt et al., 1997). This index has become in-
creasingly accepted in strategic management research
(e.g. Palepu, 1985; Baysinger and Hoskisson, 1989;
Hill et al., 1992; Hoskisson et al., 1994; Hitt et al.,
). Also, this index has been recognized to make es-
timates of PD similar to those from Rumelt’s (1974)
subjective classification methods and to have construct
validity (Hoskisson et al., 1993). This index permits
the separation of a firm’s total PD into related and
unrelated PD parts (Palepu, 1985). Related diversifica-
tion is the weighted sum of the portions of each prod-
uct part in a firm’s sales in an industry. If a firm works
in several industries, net related diversification is the
weighted sum of related diversification within each in-
dustry. Unrelated diversification is the weighted sum
of the portions of each industry in total sales. Thus,
three indices for each firm such as related diversifica-
tion, unrelated diversification, and total diversification
equal to the sum of the first and second indices can be
developed (Qian, 1997).
3.2.3. Firm performance
Overall firm performance was evaluated using the
following three measures: sales growth, market share
growth, and profitability. For sales growth and market
share growth, two key business goals for every com-
pany, we used objective, actual data from respondents
and data collected from annual reports of the sam-
ple firms and national industry reports. Profitability of
each sample firm was measured in terms of return on
investment, return on assets, revenue growth, finan-
cial liquidity, and net profit by a subjective rating rela-
tive to its major industry competitors on a seven-point
scale (Chan et al., 1997).
4. Data analysis and discussion
4.1. Regression analysis of data
Principal components factor analysis by Varimax
rotation was implemented to assess the 21 measures
associated with SCI. Appendix A shows the result of
factor analysis after Varimax rotation of factors with
reliability test results by Cronbach’s α. As can be seen
in the table, the eigenvalues of the initial extraction
for the three factors exceed 1.0 and the percentage of
variance explained ranges from 11.643 to 37.421%.
The three factors extracted have theoretical validity in
the light of previous studies on the three SCI levels,
mentioned previously. Also, the items comprising the
factors have high factor loadings, thus, reflecting high
construct validity. Cronbach α-values for the three
factors exceed 0.8, indicating high reliability. The
percentage of variance explained for all the rotated
factors ranges from 18.317 to 27.131%.
Appendix B summarizes the reliability and valid-
ity analysis of corporate SCI practices. The results
provide support for construct validity. The Cronbach
α-values are higher than the average inter-scale corre-
lation. Also, the results of item/total correlations show
a higher correlation between items and the scales they
are related with than the correlation between items
and the remaining scales. These suggest clear evi-
dence of convergent validity. Further, as can be seen in
Appendix A, the vast majority of off-factor loadings
for the items comprising each factor were low (i.e.
<0.3), providing evidence of discriminant validity for
the items.
Also, confirmatory factor analyses using EQS were
conducted to examine unidimensionality, and con-
vergent and discriminant validity for the Korean and
Japanese samples and the combined sample. The
overall fits of the three CFA were judged to be sat-
isfactory. The results for Japan were: χ 2 = 145.267,
d.f. = 186, CFI = 0.951, NFI = 0.937, NNFI =
0.933, the results for Korea were: χ 2 = 153.784,
d.f. = 186, CFI = 0.946, NFI = 0.909, NNFI =
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323 313

Table 3
Correlations results
Mean (S.D.) T-test SG MSG PRF EMP PD IMD II IS IC
Korean Japan
SG 56.9% (60.1) 55.7% (67.2) 0.232 1.00 0.58∗∗ 0.06 0.24∗∗ 0.37∗∗ 0.23∗∗ 0.10 0.12∗ 0.13∗
MSG 9.87% (22.7) 9.05% (33.0) 0.367 0.61∗∗ 1.00 0.02 0.22∗∗ 0.29∗∗ 0.25∗∗ 0.09 0.10 0.09
PRF 5.25 (1.37) 5.46 (1.22) −1.948 0.02 −0.03 1.00 0.05 0.01 0.14∗ 0.12∗ 0.17∗ 0.08
EMP 4915 (7789) 6851 (9591) −2.762 0.28∗∗ 0.25∗∗ 0.10 1.00 0.08 0.08 0.10 0.22∗∗ 0.39∗∗
PD 0.58 (0.61) 0.70 (0.69) −2.275 0.29∗∗ 0.26∗∗ −0.08 0.09 1.00 −0.38∗∗ 0.45∗∗ 0.23∗∗ 0.21∗∗
IMD 0.52 (0.55) 0.62 (0.64) −2.076 0.19∗ 0.22∗∗ 0.09 0.10 −0.42∗∗ 1.00 0.20∗∗ 0.38∗∗ 0.37∗∗
II 5.47 (1.41) 5.49 (1.56) −0.166 0.06 0.04 0.16∗ 0.09 0.36∗∗ 0.17∗ 1.00 0.18∗ 0.11∗
IS 4.88 (1.32) 5.16 (1.48) −2.463 0.07 0.07 0.14∗ 0.19∗ 0.21∗∗ 0.32∗∗ 0.23∗∗ 1.00 0.15∗
IC 5.09 (1.44) 5.36 (1.43) −2.291 0.11∗ 0.12∗ 0.03 0.35∗∗ 0.14∗ 0.45∗∗ 0.12∗ 0.12∗ 1.00
The correlations for Korean firms are below the diagonal and for Japanese firms are above the diagonal. SG: sales growth, MSG: market
share growth, PRF: profitability, EMP: number of employee, PD: product diversification, IMD: international market diversification, II:
internal integration across the supply chain, IS: integration with suppliers, IC: integration with customers.
∗ P < 0.10.
∗∗ P < 0.05.

0.918, the results for the pooled sample were: χ 2 =
174.323, d.f. = 186, CFI = 0.939, NFI = 0.925,
NNFI = 0.908 (Byrne, 1994; Hair et al., 1995). In
all three CFA results, all the standardized estimates
of the observed variables exceeded 0.500 and all the
corresponding t-values were statistically significant
at the 5% significance level. Together these indicate
convergent validity. The Lagrange Multiplier Tests
(Bentler, 1995) revealed no parameters that could
be released to significantly improve model fit. This
reflects high discriminant validity.
In the regression analyses that were used to test
the hypotheses of interest in this study, we used the
entropy measure of PD and the entropy measure of
IMD for a firm’s foreign sales. Even though the ratio
of a firm’s foreign sales is the most commonly used
measurement of the extent of a firm’s multinational
operations, Qian (1997) asserts that this measure does
not truly reflect the extent of IMD, because it fails to
reflect the multiplicity of foreign markets served by
firms. A bias is likely to occur because the measure
does not distinguish between firms having 30% of
their sales in one country and a similar amount in
several countries. So, in order to account for such
possibility, we implemented correlation analysis be-
tween the entropy measure for a firm’s foreign sales
and the entropy measure for a firm’s foreign holding
company. The result indicated that the two entropy
measures have a high correlation (0.855, P = 0.000),
thus, suggesting that there is no problem in utilizing
the entropy measure for a firm’s foreign sales as
a measure reflecting the extent of IMD. Also, our
analyses controlled for other variables that are likely
to affect firm performance, including firm size and
industry type. Firm size was measured by the num-
ber of employee (EMP). The analyses used dummy
variables to capture industry type. Industry categories
and number of sample firms are shown in Table 1.
Table 3 reports means, T-test results on the differ-
ence in means between Korean and Japanese sam-
ples, and intercorrelations for all variables used in
the study. The correlations among the independent
variables used in the analyses do not suggest poten-
tial problem with multicollinearity. Three separate
regression analyses were run. In Model 1 for test-
ing primary hypotheses, performance (sales growth,
market share growth, profitability) was regressed
on PD, PD2 , IMD, IMD2 and the interaction terms
PD∗IMD, PD∗IMD2 , and IMD∗PD2 . In Model 2,
three levels of SCI-II, IS, and IC- were introduced
as additional independent variables. In Model 3, for
testing sub-hypotheses, the interaction terms of diver-
sification and SCI-II∗PD, II∗PD2 , II∗IMD, II∗IMD2 ,
IS∗PD, IS∗PD2 , IS∗IMD, IS∗IMD2 , IC∗PD, IC∗PD2 ,
IC∗IMD, IC∗IMD2 , II∗PD∗IMD, IS∗PD∗IMD, and
IC∗PD∗IMD were introduced as additional indepen-
dent variables. Table 4 shows the result of regression
analyses testing the primary hypotheses, and Table 5
contains the results of the moderated regression
analyses (Sharma et al., 1981; Malhotra et al., 2001)
314 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323

Table 4
Regression analyses for testing primary hypothesis
Model 1

Korea Japan

SG MSG PROF SG MSG PROF

PD 0.60 0.89∗ 0.36 0.55 0.84∗∗ 0.46

PD2 −0.96∗ −1.01∗∗ −0.68 −0.73∗ −0.75∗∗ −0.48
IMD 1.02∗∗ 0.73 0.82 0.88∗∗ 0.67∗ 0.64
IMD2 −1.41∗∗ −1.36∗∗ −0.97∗ −0.81∗∗ −0.94∗∗ −0.69∗
PD∗IMD −1.53∗ −1.85∗∗ −1.37∗ −1.45∗∗ −1.40∗∗ −1.23∗
PD∗IMD2 1.23∗∗ 1.12∗ 1.01∗ 0.85∗ 1.01∗∗ 0.79∗
IMD∗PD2 1.26∗∗ 1.59∗∗ 1.10∗ 1.11∗∗ 1.07∗∗ 0.96∗
R2 0.21 0.24 0.16 0.24 0.26 0.19
F 2.43∗∗ 2.59∗∗ 2.04∗ 2.55∗∗ 3.12∗∗ 2.21∗∗
N 244 244 244 379 379 379
D: dependent variable, I: independent variable, K: Korean firms, J: Japanese firms, SG: sales growth, MSG: market share growth, PRF:
profitability, PD: product diversification, IMD: international market diversification, II: internal integration across the supply chain, IS:
integration with suppliers, IC: integration with customers. Industry dummy variables and the number of employee variable are included in
the models, but regression coefficients are not shown for them.
∗ P < 0.10.
∗∗ P < 0.05.

testing the sub-hypotheses. In order to analyze po-
tential differences in the relationships in Korea and
Japan, separate analysis was done for the samples
from the two countries.
As can be seen in Table 4, for both Korean and
Japanese samples, the first-order term representing
IMD has a statistically significant, positive influence
on sales growth performance, and IMD squared, the
second term, has a negative relationship with perfor-
mance, for all three performance measures. These
results suggest a curvilinear relationship and denote
a potential inverted U-shaped relationship between
IMD and performance, thus affirming results of pre-
vious studies on IMD. The U-shaped relationship was
also found in the relationship between PD and perfor-
mance for both sub-samples, even though the result
is not statistically significant in the regression on
profitability. Thus, Hypotheses 1 and 2 are supported.
Also, Table 4 shows the interaction effect of PD
and IMD on performance. As shown in the table, in
both sub-samples, the interaction of PD and IMD
(PD∗IMD) has significantly negative effects on all
three performance measures. However, the interac-
tion of PD and IMD squared (PD∗IMD2 ) capturing
the moderating effect of PD on IMD’s curvilin-
ear relationship with performance, has statistically
significant, positive effects on all three performance
measures. These results imply that PD positively mod-
erates the curvilinear relationship between IMD and
performance, thus, suggesting that the performance
of product diversified firm increases as a firm diver-
sifies internationally. The interaction of IMD and PD
squared (IMD∗PD2 ) capturing the moderating effect
of IMD on PD’s relationship with performance, also
has a statistically significant, positive relationship
with all three performance measures, thus, confirming
that international diversifiers with high degree of PD
can have increased performance results. These results
taken together imply that there exists an interaction
effect of PD and IMD on performance. Accordingly,
Hypothesis 3 is supported.
However, such interaction effect between PD and
IMD is not indicated in the regression results of
Model 3 in Table 5, which tests the interaction effect
of SCI in the presence of both diversifications on per-
formance. Comparison of the results of Models 1 and
3 substantiates Hypotheses 3a, 3b and 3c, which state
that SCI dominates the interaction effects of IMD and
PD. That is, in Table 5, the interaction effect of PD
and IMD on the three performance measures in Model
3 are not statistically significant, except in the case of
the regression on market share growth for Japanese
R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323 315
316 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
samples in which the terms PD∗IMD and IMD∗PD2
are marginally significant. In contrast, the interac-
tion terms (II∗PD and II∗PD2 ) of internal integration
across the supply chain and PD are statistically sig-
nificant for all three performance measures, which
support Hypothesis 1a. Also, even though there ex-
ists some difference in significance level between the
Korean sample and the Japanese sample, the interac-
tion terms (IS∗IMD, IS∗IMD2 , IC∗PD and IC∗PD2 )
of external integration with suppliers or customers
and IMD are statistically significant for all three per-
formance measures, thus substantiating Hypotheses
2a and 2b. These results show that SCI can poten-
tially extend the point of diminishing returns to PD
and IMD over time. This affirms our hypotheses that
product diversifiers with high level of internal inte-
gration and international diversifiers with high level
of external integration with suppliers and customers
can increase their performance.
All of the above results also imply that internal in-
tegration and external integration with suppliers and
customers may substitute for the role of the interaction
effect between both diversifications on the curvilinear
relationship between PD/IMD and firm performance.
However, the test results for three-way interaction
terms of PD, IMD, and three levels of SCI indicate
that there is a difference in the intensity of such sub-
stitution effect between the Korean sample and the
Japanese sample. As can be seen in Table 5, in the
case of the Korean sample, even though all signs are
negative as expected, IS∗PD∗IMD and IC∗PD∗IMD
are statistically insignificant for sales growth and
market share growth, and even for profitability, there
is a difference in significance level compared to the
Japanese sample. This suggests that in the case of
Korean firms, SCI does not completely take the place
of the interaction effect between both diversifications
on the PD∗IMD-performance relationship. T-test re-
sults in Table 3 suggest a viable reason for the above
discrepancy between the two samples. As can be seen
in the table, Korean firms have significantly lower
level of external integration with suppliers and cus-
tomers relative to Japanese firms. This suggests that
such low levels of IS and IC make it difficult for
SCI to effectively substitute for the interaction effect
between both diversifications. Further, this interpre-
tation suggests that attainment of a certain level of
SCI is necessary for the substitution effect of SCI to
manifest. The validity of this argument is supported
by the results in Table 5. In the case of II in which
Korean firms are statistically indistinguishable from
Japanese firms in Table 3, II∗PD∗IMD is statistically
significant for all three performance measures even
though some significances are marginal at 10% level.
One more interesting point is that, in Table 3, EMP
has significant, positive correlations with IS and IC.
This result suggests that company size may have a
significant influence on external integration with sup-
pliers and customers. In other words, large companies
might derive more benefits relative to small compa-
nies through external integration with suppliers and
customers. External integration requires larger invest-
ments for the implementation of system-wide informa-
tion network and more effort for efficiently managing
relatively high transaction and coordination costs. This
implies that large companies can minimize such bur-
dens, in terms of economies of scale, more effectively
and efficiently relative to small companies. As can be
seen in the T-test result on EMP in Table 3, there is a
significant difference in average size between Korean
and Japanese firms. It can be recognized that differ-
ence in average size of firms is related to the difference
in the levels of IS and IC between the two countries.
The difference in significance level of the interaction
terms IS∗IMD, IS∗IMD2 , IC∗PD and IC∗PD2 on per-
formance for Korea and Japan indicated in Table 5
shows that the correlation between company size and
the levels of IS and IC can also have a significant in-
fluence on performance.
4.2. Detailed analyses of diversification-performance
response curves
In order to examine the aforementioned interaction
effect of SCI and diversification in more depth (i.e. a
detailed analysis of the implications of the hypothe-
ses), we cluster-analyzed the sample of firms, grouping
them on the three levels of SCI, and then implemented
separate regression analyses for each group. We do
not present separate analysis for the samples from
the two countries, because the sample sizes are rela-
tively small. For example, in the Korean sample, the
number of firms characterized by ineffective integra-
tion and system-wide integration strategies (discussed
later), was <30, and therefore, inadequate for reli-
able analysis. Also, the results of separate regression
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
Table 6
The type of supply chain integration strategy
Integration level Group
A B
Company’s integration with 1.44(L) 4.58(H)
suppliers B, C, D ↔ A, E, F
Internal integration across 3.08(M) 2.88(M)
the supply chain D, E ↔ A, B ↔ C, F
Company’s integration with 4.16(H) 1.87(L)
customers A, C, D ↔ B, E, F
CBI SBI
Italic: the result of Duncan test (H: high, M: medium, L: low). IEI: ineffective integration, II: internal integration, SBI: supplier-based
integration, CBI: customer-based integration, EI: external integration, SI: system-wide integration.
∗ P ≤ 0.01.
analyses for subgroups, in both Korean and Japanese
samples, characterized by other strategies did not show
any significant differences. The same conclusion was
reached when compared to the regression results for
the pooled sample.
For grouping the data based on the three levels
of SCI, cluster analyses were performed using the
average scores of items for which high construct va-
lidity was demonstrated in the factor analysis results
(Appendices A and B) for each integration level. For
clustering, the number of groups comprising the most
homogeneous sample observations should be deter-
mined. In order to determine the most appropriate
number of clusters, the dendogram for the cluster
analysis was inspected for relatively dense “branches”
to confirm the number of major groups that had
been formed (Alderderfer and Blashfield, 1984), and
then the incremental changes in the agglomeration
coefficient were examined. Our samples indicated
that relatively large changes in the agglomeration
coefficient are found between five and six clusters.
This implied that six clusters would be the most
appropriate choice (Ketchen and Shook, 1996) for
cluster analysis. The result of nonhierarchical clus-
tering via discriminant analysis showed that 99.2%
of the cases were correctly classified into the above
six clusters. Based on these results and high in-
terpretability, the six-cluster solution was deemed
appropriate.
To get a more precise idea of the characteristics of
six groups to be extracted from the cluster analysis,
Duncan multiple range test, using factor scores was
317
ANOVA (F value)
C D E F
4.18(H) 5.09(H) 1.87(L) 0.99(L) 5.556∗
1.75(L) 5.67(H) 5.34(H) 1.17(L) 5.284∗
4.52(H) 4.79(H) 1.28(L) 0.96(L) 4.816∗
EI SI II IEI Pillais = 1.603∗
performed on the sample. The results are shown in
Table 6.
As shown in Table 6, the result indicates a statisti-
cally significant difference on each factor among the
six groups (i.e. rows in Table 6), suggesting that there
exists in the sample six distinct types of SCI strategy.
These are labeled as: ineffective integration, internal
integration, external integration, supplier-based inte-
gration, customer-based integration, system wide in-
tegration.
Tables 7 and 8 show the results of regression analy-
ses for models testing primary hypothesis for the sub-
groups.
These results reveal more clearly the significance of
SCI for PD and IMD. As can be seen in Table 7, in
the case of ineffective integration group, both PD and
IMD do not have statistically significant influence on
any of the performance measures. But, the two inter-
action variables associated with PD and IMD are sig-
nificant and have a positive relationship with all three
performance measures. The results for system-wide
integration group in Table 8 are opposite of the above
results. That is, the two interaction variables do not
have significant effect on any of the three performance
measures. However, the main effects of PD and IMD
are significant and positive on all three performance
measures. These two results suggest that in firms with
system-wide SCI, SCI substitutes for the role of inter-
action effect of PD and IMD on performance. Also,
the results for internal integration group and exter-
nal integration group show that product diversifiers
with high level of internal integration within the firm
318 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323

Table 7
Regression analyses for subgroup (1)
Model for testing primary hypotheses
SG MSG PROF SG MSG PROF
Ineffective integration (n = 72)
PD 0.513 0.339 0.482 1.104 −0.893 −1.153
PD2 −1.020∗∗ −0.888∗∗ −0.752∗ −2.412∗∗ −2.125∗ −1.745
IMD 0.490 0.641 0.384 −1.081 1.322 −0.794
IMD2 −1.295∗∗ −1.236∗∗ −0.944∗ −2.504∗∗ −2.351∗∗ −1.850∗
PD∗IMD −4.206∗∗ −6.242∗∗ −3.532∗∗
PD∗IMD2 2.661∗∗ 3.698∗∗ 2.310∗∗
IMD∗PD2 3.019∗∗ 4.746∗∗ 2.455∗∗
R2 0.11 0.11 0.09 0.23 0.24 0.18
F 1.55∗ 1.61∗ 1.33∗ 2.58∗∗ 3.02∗∗ 2.11∗∗
Internal integration (n = 125)
PD 0.895∗∗ 1.126∗∗ 0.681∗ 1.304∗ 1.958∗∗ 1.189∗
PD2 −0.355 −0.287 −0.407 −0.823 −0.746 −0.966
IMD 0.458 0.437 0.376 0.664 0.727 −0.573
IMD2 −0.787∗∗ −0.996∗∗ −0.593 −1.423∗∗ −1.762∗∗ −1.042∗
PD∗IMD −2.227∗ −2.271∗ −1.627
PD∗IMD2 1.852∗∗ 1.834∗∗ 1.517∗
IMD∗PD2 1.291 1.379 .752
R2 0.28 0.27 0.17 0.36 0.34 0.22
F 3.33∗∗ 3.27∗∗ 2.09∗∗ 4.89∗∗ 4.92∗∗ 2.42∗∗
External integration (n = 137)
PD 0.482 0.465 0.380 0.844 0.815 −0.708
PD2 −0.637∗ −0.655∗ −0.347 −10.551∗ −1.772∗∗ −0.892
IMD 1.328∗∗ 0.886∗∗ 0.706∗ 2.034∗∗ 1.342∗ 1.212∗
IMD2 −0.271 −0.311 −0.360 −0.619 −0.663 −0.792
PD∗IMD −2.504∗∗ −2.094∗ −1.924
PD∗IMD2 1.225 1.045 1.157
IMD∗PD2 2.471∗∗ 2.045∗∗ 1.671∗
R2 0.32 0.26 0.17 0.42 0.40 0.26
F 4.30∗∗ 3.21∗∗ 2.22∗∗ 6.09∗∗ 5.64∗∗ 3.42∗∗
D: dependent variable, I: independent variable, K: Korean firms, J: Japanese firms, SG: sales growth, MSG: market share growth, PRF:
profitability, PD: product diversification, IMD: international market diversification, II: internal integration across the supply chain, IS:
integration with suppliers, IC: integration with customers. Industry dummy variables and the number of employee variable are included in
the models, but regression coefficients are not shown for them.
∗ P < 0.10.
∗∗ P < 0.05.

or international diversifiers with high degree of exter-
nal integration with suppliers and customers can have
significant positive returns without the need for both
types of diversification.
5. Implications and conclusion
The need to react to market changes and the crit-
ical role of supply chain in meeting this need, and
the potential benefits of integrating the supply chain
can no longer be ignored. This potential, however,
will be realized only if the inter-relationships among
different parts of the supply chain are recognized,
and proper alignment is ensured between the design
and execution of the company’s competitive strategy
(Stevens, 1989). This paper is an attempt to show how
this potential can be realized through linking SCI strat-
egy to the corporate diversification strategy.
The results of regression analysis on three different
models for testing the hypotheses of this study indi-
cate that internal integration across the supply chain
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323 319

Table 8
Regression analyses for subgroup (2)
Model for testing primary hypotheses
SG MSG PROF SG MSG PROF
Supplier-based integration (n = 90)
PD 0.759∗ 0.789∗ 0.600 1.259 1.357∗ −1.016
PD2 −0.361 −0.710∗ −0.403 −0.975 −1.741∗ −1.140
IMD 0.948∗∗ 0.725 0.552 1.460∗ 1.207 −0.807
IMD2 −0.895∗ −0.275 −0.686 −1.603∗∗ −0.668 −1.319∗
PD∗IMD −2.128 −2.413 −2.938∗∗
PD∗IMD2 1.450 1.927∗ 2.038∗
IMD∗PD2 1.828 1.756 2.487∗∗
R2 0.18 0.21 0.16 0.27 0.30 0.22
F 2.44∗∗ 2.70∗∗ 2.12∗∗ 3.33∗∗ 3.70∗∗ 2.44∗∗
Customer-based integration (n = 115)
PD 0.776∗∗ 0.530 0.562 1.277∗ −0.849 0.961
PD2 −0.681∗ −0.281 −0.550 −1.670∗∗ −0.716 −1.361∗
IMD 0.658∗ 1.046∗∗ 0.572 1.099 1.543∗∗ −0.936
IMD2 −0.274 −0.813∗∗ −0.410 −0.668 −1.247∗ −0.753
PD∗IMD −1.938 −2.770∗∗ −2.219∗
PD∗IMD2 1.202 1.534∗ 1.214
IMD∗PD2 1.431 2.256∗∗ 1.824∗
R2 0.27 0.24 0.18 0.32 0.33 0.24
F 3.30∗∗ 3.18∗∗ 2.35∗∗ 4.31∗∗ 4.53∗∗ 3.23∗∗
System-wide integration (n = 84)
PD 0.952∗∗ 1.034∗∗ 0.832∗ 1.604∗ 1.744∗∗ 1.418∗
PD2 −0.533 −0.741∗ −0.434 −1.304 −1.817∗ −1.107
IMD 1.205∗∗ 1.654∗∗ 0.944∗∗ 1.977∗∗ 2.641∗∗ 1.582∗
IMD2 −0.584 −0.836∗ −0.480 −1.115 −1.577∗ −1.008
PD∗IMD −2.031 −2.413 −1.773
PD∗IMD2 1.328 1.597 1.002
IMD∗PD2 1.623 1.909 1.589
R2 0.34 0.36 0.25 0.46 0.48 0.35
F 4.62∗∗ 5.05∗∗ 3.31∗∗ 6.51∗∗ 7.35∗∗ 4.72∗∗
D: dependent variable, I: independent variable, K: Korean firms, J: Japanese firms, SG: sales growth, MSG: market share growth, PRF:
profitability, PD: product diversification, IMD: international market diversification, II: internal integration across the supply chain, IS:
integration with suppliers, IC: integration with customers. Industry dummy variables and the number of employee variable are included in
the models, but regression coefficients are not shown for them.
∗ P < 0.10.
∗∗ P < 0.05.

and external integration with suppliers and customers
positively moderate the curvilinear relationships be-
tween PD and performance, and between IMD and
performance, respectively. Also, the results of regres-
sion analysis for subgroups classified by the type
of SCI, show that as the level of SCI increases, the
interaction effect of PD and IMD on performance
is insignificant, thus reflecting that SCI may substi-
tute for the role of interaction between PD and IMD
as a moderator of the positive relationship between
diversification and performance.
Results of this study make several theoretical con-
tributions. First, strategy literature has not consistently
shown that there is a linkage between diversification
and performance. Researchers have offered different
reasons for the lack of consistency of this relation-
ship. As a possible reason, previous studies have sug-
gested that there might be moderating variables that
have to be considered to better explain the relation-
ship between diversification and performance (Bettis,
1981; Christensen and Montgomery, 1981), and
thus, the relationship between diversification and
320 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
performance might be impacted by such moderating
variables. We started with the hypothesis that the
curvilinear relationship between diversification and
performance might be influenced by SCI acting as a
moderating variable. We have shown that it does.
The effect of SCI, which this paper has identified,
has significance for successful diversification beyond
simply a substitute for the interaction between PD and
IMD. In other words, even if we assume that the align-
ment between PD and IMD strategies is successfully
achieved, such alignment may not be adequate to de-
rive the full benefit of the positive relationship between
high level of PD or IMD and performance. The valid-
ity of this argument can be confirmed in the results of
regression analysis for subgroups in Tables 6 and 7.
That is, as shown in the tables, in the case of in-
effective integration group, the interaction effect of
both diversifications on performance is much more
significant relative to other groups. However, the ex-
planatory power (R2 ) of such interaction model is not
more than 22–27%. In the case of system-wide inte-
gration group, which has the lowest interaction effect
of both diversifications, the explanatory power (R2 ) is
35–48%. These results imply that in order to pursue
sustainable performance growth beyond performance
stability obtained simply by dispersing the risks and
the administrative burdens due to diversity, complex-
ity of product and IMDs, the linkage of systematic SC
integration with diversification strategies is indispens-
able. This result is another contribution of this paper.
Appendix A. Validity test of supply chain integration measures
Measurement item Factor
Internal integration
across SC
(α a = 0.9363)
Data integration among internal functions 0.852
through information network
System-wide information system 0.832
integration among internal functions
The construct of systematic interaction 0.814
system between production and sales
Data integration in production process 0.812
Integrative inventory management 0.807
Real-time searching of logistics-related 0.796
operating data
The above argument leads to some practical impli-
cations for diversifiers with relatively low level of SC
integration. Clearly, for successful product and IMDs,
internal integration across the supply chain and exter-
nal integration with suppliers and customers should
be prerequisites. However, the systematic establish-
ment of such SCI can not be achieved easily in a
short period. Considerable infrastructural and tech-
nological investments and experience in coordinating
and managing a variety of conflicts and complexities
which may occur from the pursuit of SCI, are required.
Accordingly, radical approaches for SCI should be
avoided, and incremental approaches for integrating
gradually and systematically the structure of the en-
tire supply chain simultaneously should be pursued.
An approach that can be pursued is to keep the lev-
els of product and IMDs moderate and adopt one of
the matched SCI strategies. This implies that the firm
must gradually transition from these SCI strategies to
other matched SCI strategies that can yield sustained
performance as diversification levels increase. Future
research might examine specific aspects of diversifi-
cation and SCI to identify the best combination of the
constituent dimensions of each to pursue. Also, fu-
ture research should analyze more precisely the effect
of company size or other variables on the interaction
effect of diversification and SC integration on perfor-
mance. For this, replication of the study described in
this paper with a sample of US and European firms
would be helpful.
Integration with Integration with
customers suppliers
(α a = 0.8423) (α a = 0.8885)
0.242 0.242
0.103 0.004
0.140 0.279
0.064 0.135
0.180 0.237
0.171 0.177
 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323 321

Appendix A (Continued )
Measurement item Factor

Internal integration Integration with Integration with

across SC customers suppliers
(α a = 0.9363) (α a = 0.8423) (α a = 0.8885)
Real-time searching of the level of 0.768 0.037 0.088
inventory
The utilization of periodic 0.767 −0.074 0.189
interdepartmental meetings among
internal function
The level of organic linkage with −0.057 0.795 0.045
customers through information network
The level of computerization for customer 0.214 0.776 0.053
ordering
The level of sharing on market information 0.126 0.753 0.008
The level of communication with customers −0.044 0.708 0.033
The agility of ordering process 0.052 0.679 0.222
Follow-up with customers for feedback 0.190 0.650 0.041
The frequency of periodical contacts with 0.160 0.647 0.111
customers
Information exchange with suppliers 0.057 0.037 0.818
through information technology
The establishment of quick ordering system 0.169 0.001 0.813
The level of strategic partnership with 0.109 0.001 0.778
suppliers
Stable procurement through network 0.260 0.118 0.769
The participation level of suppliers in the 0.307 0.249 0.746
process of procurement and production
The participation level of suppliers in the 0.397 0.317 0.639
design stage
Eigenvalue of the initial extraction 7.858(5.697) 3.187(3.944) 2.445(3.846)
(eigenvalue for the rotated factors)
Pct. of Var. of the initial extraction (Pct. of 37.421(27.131) 15.176(18.780) 11.643(18.317)
Var. for the rotated factors)
a The result of Cronbach α-test.

Reliability and validity of supply chain management measures

Factor Cronbach’s α Average interscale Item/total correlation

correlation
Scale items Non-scale items

Internal integration 0.9363 0.348158 0.779609 0.292547

Integration with customers 0.8423 0.364986 0.844530 0.293845
Integration with suppliers 0.8885 0.233805 0.733788 0.190179
322 R. Narasimhan, S.W. Kim / Journal of Operations Management 20 (2002) 303–323
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