Abstract
This paper explores the impact of business model extensions (BMEs) on company performance by distinguishing between demand-related (BME-DR) and demand-unrelated (BME-DU) business model extensions. We explain that BME-DRs can enhance customer utility and, thus, drive firm performance. Furthermore, we hypothesize that a negative business outlook and the degree of diversification are important moderators of the BME-DR–performance relationship. We use an event study methodology to substantiate this claim and analyze abnormal returns following BME announcements. This approach allows us to precisely measure market reactions to announcements of BME-DR and BME-DU. Our findings reveal that BME-DR leads to higher abnormal stock market returns than BME-DU. Moreover, companies with a pessimistic business outlook disproportionately benefit from BME-DR. Finally, contrary to our hypothesis, we find that the benefits of BME-DR do not uniformly accrue. Rather, the relationship between diversification and the effectiveness of such extensions follows an inverted U-shaped pattern, which suggests limited benefits for both minimally and highly diversified firms. We discuss these findings and conclude that at a certain level of overall company diversification, the cost of managing the added complexity outweighs the benefits of BME-DR.