Why do some companies buy what they know, while others look elsewhere?

Acquisition is a powerful tool in the strategic playbook of any growing business. But when it comes to choosing what to acquire, firms face a fundamental crossroads: Should they stick to what they know—buying businesses in similar industries—or venture into unfamiliar terrain?

Traditional explanations for acquisition choices emphasize industry shocks, resource synergies, or macroeconomic cycles. Yet, these frameworks often miss why two similar firms in the same market might make radically different decisions: one acquiring a close competitor, the other diving into a completely different sector.

This study, conducted by Iyer, Baù, Chirico, Patel, and Brush, offers a fresh take—one rooted in behavioral science. Drawing from the Behavioral Theory of the Firm (BTF), the authors argue that how firms respond to their own underperformance explains the scope and boldness of their acquisition strategies. For family businesses in particular—where performance, values, and identity are deeply intertwined—this lens offers actionable insight into when it’s time to stay the course and when to embrace reinvention.

What We Studied

The researchers analyzed acquisition activity across 1,409 private Swedish firms over a seven-year period (2001–2007), using two rich datasets: RAMS (providing financial and firm-level data) and LISA (covering employer-employee dynamics). Their focus was not just on whether firms made acquisitions, but on the relatedness of those acquisitions—both in terms of industry similarity and skill similarity.

Crucially, they introduced two new constructs that go beyond traditional performance measures:

1. Relative Attainment Discrepancy
   This measures the degree to which current performance is worse than the firm’s previous underperformances. It captures a psychological element—how bad today's shortfall feels compared to past failures.
2. Persistent Attainment Discrepancy
   This tracks how often a firm underperforms over time. Think of it as a measure of “chronic disappointment”—the repeated experience of not meeting internal goals.

Together, these constructs offer a more nuanced view of how firms process failure, going beyond simple profit margins or growth trends.

Key Insights

1. Below-Aspiration Performance Sparks Local Search

Firms that are not meeting their performance aspirations tend to play it safe—at first. They look for solutions in familiar territory. This might mean acquiring businesses within the same industry or those that share similar skill sets.

This finding aligns with BTF, which proposes that firms engage in problemistic search—a reactive, often conservative approach to problem-solving. When things go wrong, firms don’t immediately take wild risks. They first seek incremental improvements within their existing comfort zone.

For family businesses, this instinct resonates: stick with what you know, leverage existing expertise, and minimize disruption. Related acquisitions offer familiarity, smoother integration, and lower perceived risk—important factors for firms managing both business and family continuity.

2. Persistent Underperformance Drives Distant Search

However, the game changes when underperformance becomes persistent. Firms that experience repeated failures over time are more likely to broaden their search and consider acquisitions that are less related to their core business.

This is a significant behavioral shift. It's not a single crisis, but a pattern of continued disappointment that prompts firms to question whether incremental fixes are enough. At some point, they recognize that familiar strategies are no longer delivering results—and that realization pushes them toward riskier, transformative decisions.

The study found a clear negative association between persistent attainment discrepancy and acquisition relatedness. In short: the more often a firm underperforms, the less related its acquisitions become.

3. Relative Magnitude Isn’t Enough to Trigger Bold Moves

Interestingly, firms do not respond to larger-than-usual underperformance (relative attainment discrepancy) by taking bigger risks. Even when current performance dips significantly below prior low points, firms still lean toward related acquisitions. It appears that severity alone isn’t enough to push firms out of their comfort zones.

This challenges assumptions that dramatic downturns necessarily trigger bold moves. For family businesses, this is an especially important insight. It suggests that firms may overestimate their resilience to one-off performance shocks and underestimate the strategic risks of long-term stagnation.

4. Persistence Weakens the “Local Search” Instinct

Even when firms initially respond to performance gaps with local acquisitions, persistence of the problem eventually weakens this instinct. The study’s interaction analysis showed that firms experiencing repeated failures gradually shift away from related acquisitions—even if they began their search locally.

This suggests a behavioral tipping point: repeated underperformance reduces the perceived value of “more of the same” and opens the door to unorthodox strategies. For family firms facing plateauing growth or market shifts, recognizing this tipping point early could be key to staying competitive.

Takeaways for Family Businesses

Recognize the Signs of Strategic Fatigue

Short-term underperformance isn’t necessarily a call to change direction. But when a firm repeatedly falls short of its goals, it may signal deeper issues with current strategies. Leaders—especially in family firms—should track not just performance metrics, but patterns of missed expectations.

Beware of the Comfort Trap

It’s natural to prefer related acquisitions. They promise easier integration and align with existing knowledge. But too much comfort can lead to stagnation. If repeated efforts to improve through local search aren’t closing the gap, it may be time to look beyond familiar terrain.

Use Behavioral Triggers to Guide Strategy

Firms should consider integrating behavioral indicators—like persistence of underperformance—into their strategic dashboards. These metrics offer early warning signals that traditional KPIs may miss.

Open Conversations Around Risk

Family firms often have conservative risk profiles due to legacy concerns or generational dynamics. Yet, this research suggests that taking calculated risks, especially after sustained poor performance, may be the healthier long-term choice. Boards and owners should facilitate open discussions around when boldness is warranted.

Impact

This study reshapes how we understand acquisition strategy—not as a reaction to external market forces alone, but as a product of internal behavioral responses to performance.

It highlights that persistence in failure, rather than crisis-level downturns, is a key driver of strategic transformation. For family businesses, this offers a compelling narrative: growth strategy isn't just about seizing opportunity—it's also about knowing when to abandon familiar paths that no longer lead forward.

The work also enriches behavioral theory by showing that not all underperformance is equal in how it shapes search and decision-making. The study’s novel constructs offer tools for researchers and practitioners alike to better predict—and guide—strategic behavior.

Recommendations

• Monitor for Persistent Underperformance: Develop internal metrics to track patterns of below-aspiration performance, not just annual profits.
• Design “Behavioral Dashboards” for boards and leadership teams that flag when repeated shortfalls occur—offering structured ways to discuss more radical strategic options.
• Balance Continuity with Adaptability: Related acquisitions make sense for leveraging family firm strengths. But don’t rule out unrelated opportunities—especially when repeated failures suggest a deeper shift is needed.
• Practice Strategic Foresight: Encourage forward-looking evaluations of industry shifts, resource constraints, and innovation gaps—before persistent underperformance forces a reactionary pivot.
• Foster a Culture of Constructive Risk: Equip future generations of family leaders to embrace distant search as a proactive strategy, not a last resort.

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