Volume 17, Number 3 Article by Madhusudhan Prasad Varanasi September, 2005
Diversification Strategy and Firm Performance :
Corporate diversification has long been the engine of new product development. Diversification emerged as a phenomenon coincidental with rapid spurts in technology and breakthrough research in electronic and digital control systems that produced revolutionary changes in consumer and capital markets. Governmental policies and regulations can also be a spur to corporate diversification.
Yet, of all the outstanding characteristics of business firms, perhaps the most inadequately treated aspect is the diversification of their activities. This article begins by examining the core issues behind product diversification — its conceptualisation, categorisation and measurement and traces the rationale behind the theoretical framework of diversification through the Traditional Theory and Neoclassical Theory approaches of Economics, and the doctrine of managerialism. It surveys the studies on diversification and firm performance, in particular those that have addressed themselves to the relationship between a firm's degree of diversification and subsequent performance.
The article points to two major lacunae in the existing studies particularly in the Indian context.. Cross-sectional studies are not successful in determining the true causal relationship between diversification and performance as they employ a number of diverse industrial units across industry groups, losing the powerful industry specific effects in the analytical procedure. By examining diversification independent of its industry context, prior studies may have glossed over the complexities of the relationship and performance. The relationship between diversification and financial performance can be better understood if the product-wise revenues of a business firm are appropriately and consistently disaggregated.
Reprint No 05307b
