Analysing the relationship between diversification strategy and firm performance: the role of the economic cycle
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Published
18-12-2019
Esteban López Zapata
Fernando Enrique García Muiña
Susana María García Moreno
Abstract
The relationship between corporate strategies and firm performance has been one of the key debates in the discipline of Strategic Management. There are studies that analyse the moderating role that certain variables may play in that relationship. These variables tend to refer to aspects within the firm or, at the very least, within the competitive environment in which a firm operates. Nevertheless, the empirical evidence on the part the general environment plays from an economic perspective is much less common, and focuses on large corporations and on periods of economic growth. Accordingly, using a panel of 1,828 Spanish manufacturing firms of different sizes, an analysis is conducted of the differences in Return On Assets (ROA), Growth in Sales (GS) and Labor Productivity (LP) between specialised firms, those with related diversification, and those with unrelated diversification, between 2002 and 2011, in which there was a period of growth alternated with another one of economic recession. Although some superiority is noted of related diversification and specialisation over unrelated diversification, the differences between strategies are less significant in periods of economic recession, and vary according to the dimension of performance considered. These results reveal the need to consider the economic cycle as a contingent factor that affects the impact corporate strategies have on firm performance.
How to Cite
López Zapata, E., García Muiña, F. E., & García Moreno, S. M. (2019). Analysing the relationship between diversification strategy and firm performance: the role of the economic cycle. Cuadernos De Gestión, 19(2), 15–32. https://doi.org/10.5295/cdg.170738el
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Keywords
Corporate strategy, diversification, economic cycle, performance
References
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Ansoff, H. I., 1957. Strategies for diversification. Harvard Business Review, 35(5), 113-124.
Barney, J., 1991. Firm resources and sustained competitive advantage. Journal of Manage-ment, 17(1), 99-120.
Bausch, A., and Krist, M., 2007. The effect of context-related moderators on the inter-nationalization-performance relationship: Evidence from meta-analysis. Management International Review, 47(3), 319-347.
Bengtsson, L., 2000. Corporate strategy in a small open economy: Reducing product diver-sification while increasing international diversification. European Management Jour-nal, 18(4), 444-453.
Benito, D., Guerras, L. Á., and Zuñiga, J. Á., 2012. Four decades of research on product diversification: a literature review. Management Decision, 50(2), 325-344.
Berger, P. G., and Ofek, E., 1995. Diversification’s effect on firm value. Journal of Financial Economics, 37(1), 39-65.
Campa, J. M., and Kedia, S., 2002. Explaining the diversification discount. Journal of Finance, 57(4), 1731-1762.
Cerrato, D., Alessandri, T., and Depperu, D., 2016. Economic crisis, acquisitions and firm performance. Long Range Planning, 49(2), 171-185.
Chakrabarti, A., Singh, K., and Mahmood, I., 2007. Diversification and performance: evidence from East Asian firms. Strategic Management Journal, 28(2), 101-120.
Chandler, A. D., 1962. Strategy and Structure: Chapters in the History of the American Industrial Enterprise. Cambridge: MIT Press.
De la Fuente, G., and Velasco, P., 2015. The effect of the financial crisis on the value of corporate diversification in Spanish firms. Spanish Journal of Finance and Accounting, 44(1), 1-23.
Denis, D. J., Denis, D. K., and Sarin, A., 1997. Agency problems, equity ownership, and corporate diversification. Journal of Finance, 52(1), 135-160.
Dimovski, V., and Škerlavaj, M., 2005. Performance Effects of Organizational Learning in a Transitional Economy. Problems and Perspectives in Management, 3(4), 56-67.
Elango, B., and Sethi, S. P., 2007. An exploration of the relationship between country of origin (COE) and the internationalization-performance paradigm. Management International Review, 47(3), 369-392.
Forcadell, F. J., 2002. Análisis dinámico de la relación entre diversificación empresarial y recursos tecnológicos. una aplicación a las empresas industriales españolas. Tesis, (Dr). Universidad Rey Juan Carlos.
Gort, M., 1962. Diversification and Integration in American Industry. Princenton: Princenton University Press.
Grant, R. M., 1991. The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation. California Management Review, 33(3), 114-135.
Grant, R. M., Jammine, A. P., and Thomas, H., 1988. Diversity, Diversification, and Profitability among British Manufacturing Companies, 1972-84. Academy of Management Journal, 31(4), 771-801.
Guerras, L. Á., and Navas, J. E., 2007. La dirección estratégica de la empresa. Teoría y aplicaciones. Madrid: Thomson Civitas.
Hair, J. F., Anderson, R. E., Tatham, R. L., and Black, W. C., 1999. Análisis multivariante. Madrid: Prentice Hall.
Huerta, P., Martínez, P., and Navas, J. E., 2004. Cómo medir la diversificación corporativa: Una aplicación a las empresas industriales españolas. Theoría: Ciencia, Arte y Humanidades, 13, 59-68.
Huerta, P., Pedraja, L., Navas, J. E., and Almodóvar, P. A., 2008. Las estrategias corporativas y los resultados empresariales: un análisis por tipo de estrategia corporativa y sector industrial en España. Cuadernos de Administración, 21(37), 61-71.
Imel, B., and Helmberger, P., 1971. Estimation of Structure-Profit Relationships with Application to the Food Processing Sector. American Economic Review, 61(4), 614- 627.
Jensen, M. C., and Meckling, W. H., 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Jerez, P., 2001. La gestión de recursos humanos y el aprendizaje organizativo: Incidencia e implicaciones. Tesis, (Dr). Universidad de Almería.
Jiménez, D., and Sanz, R., 2006. Innovación, aprendizaje organizativo y resultados empresariales. Un estudio empírico. Cuadernos de Economía y Dirección de la Empresa, 9(29), 31-55.
Kuppuswamy, V., and Villalonga, B., 2010. Does diversification create value in the presence of external financing constraints? Evidence from the 2007–2009 financial crisis. Working Paper 10-101. Harvard Business School.
Lubatkin, M., and Chatterjee, S., 1991. The strategy shareholder value relationship: Testing temporal stability across market cycles. Strategic Management Journal, 12(4), 251-270.
Mahoney, J. T., and Pandian, J. R., 1992. The Resource-Based View Within the Conversation of Strategic Management. Strategic Management Journal, 13(5), 363-380.
Markides, C. C., and Williamson, P. J., 1994. Related Diversification, Core Competencies and Corporate Performance. Strategic Management Journal, 15(S2), 149-165.
Mayer, M., and Whittington, R., 2003. Diversification in context: A cross-national and cross-temporal extension. Strategic Management Journal, 24(8), 773-781.
Miller, D. J., 2004. Firms’ technological resources and the performance effects of diversification: a longitudinal study. Strategic Management Journal, 25(11), 1097-1119.
Miller, R. A., 1969. Market Structure and Industrial Performance: Relation of Profit Rates to Concentration, Advertising Intensity, and Diversity. Journal of Industrial Economics, 17(2), 104-118.
Montgomery, C. A., 1982. The Measurement of Firm Diversification: Some New Empirical Evidence. Academy of Management Jorunal, 25(2), 299-307.
Ortega, E., and Peñalosa, J., 2012. The Spanish economic crisis: key factors and growth challenges in the euro area. Banco de Espana Occasional Paper (1201).
Page, D. E., Jahera Jr, J. S., and Lloyd, W. P., 1988. Does Business Diversification Affect Performance?: Some Further Evidence. Quarterly Journal of Business and Economics, 27(1), 130-147.
Palepu, K., 1985. Diversification strategy, profit performance and the entropy measure. Strategic Management Journal, 6(3), 239–255.
Palich, L. E., Cardinal, L. B., and Miller, C. C., 2000. Curvilinearity in the DiversificationPerformance Linkage: An Examination of over Three Decades of Research. Strategic Management Journal, 21(2), 155-174.
Pangarkar, N., and Lie, J. R., 2004. The impact of market cycle on the performance of Singapore acquirers. Strategic Management Journal, 25(12), 1209-1216.
Penrose, E. T., 1959. The Theory of the Growth of the Firm. New York: Wiley.
Porter, M. E., 1987. Ventaja competitiva: Creación y sostenimiento de un desempeño superior. México: Compañía Editorial Continental.
Prahalad, C. K., and Bettis, R. A., 1986. The Dominant Logic: A New Linkage between Diversity and Performance. Strategic Management Journal, 7(6), 485-501.
Prahalad, C. K., and Hamel, G., 1990. The Core Competence of the Corporation. Harvard Business Review, 68(3), 79-91.
Ravichandran, T., Liu, Y., Han, S., and Hasan, I., 2009. Diversification and Firm Performance: Exploring the Moderating Effects of Information Technology Spending. Journal of Management Information Systems, 25(4), 205-240.
Rhoades, S. A., 1973. The Effect of Diversification on Industry Profit Performance in 241 Manufacturing Industries: 1963. Review of Economics and Statistics, 55(2), 146-155.
Ritala, P., 2012. Coopetition strategy–when is it successful? Empirical evidence on innovation and market performance. British Journal of Management, 23(3), 307-324.
Rumelt, R. P., 1982. Diversification Strategy and Profitability. Strategic Management Journal, 3(4), 359-369.
Selling, T. I., and Stickney, C. P., 1989. The effects of business environment and strategy on a firm’s rate of return on assets. Financial Analysts Journal, 45(1), 43-68.
Shayne Gary, M., 2005. Implementation Strategy and Performance Outcomes in Related Diversification. Strategic Management Journal, 26(7), 643-664.
StataCorp., 2009. Stata: Release 11. Statistical Software
Stowe, J. D., and Xing, X., 2006. Can growth opportunities explain the diversification discount? Journal of Corporate Finance, 12(4), 783-796.
Suárez, I., 1993. Fundamentos Teóricos y Empíricos de la Relación entre Diversificación y Resultados Empresariales: Un Panorama. Revista de Economía Aplicada, 1(3), 139- 165.
Suárez, I., 1994. Estrategia de diversificación y resultados de la empresa española. Revista de Economía Aplicada, 2(4), 103-128.
Tanriverdi, H., and Venkatraman, N., 2005. Knowledge relatedness and the performance of multibusiness firms. Strategic Management Journal, 26(2), 97-119.
Teece, D. J., Pisano, G., and Shuen, A., 1997. Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18(7), 509-533.
Varadarajan, P. R., and Ramanujam, V., 1987. Diversification and performance: A reexamination using a new two-dimensional conceptualization of diversity in firms. Academy of Management Journal, 30(2), 380-393.
Villalonga, B., 2004. Diversification discount or premium? New evidence from the business information tracking series. Journal of Finance, 59(2), 479-506.
Wernerfelt, B., 1984. A Resource-Based View of the Firm. Strategic Management Journal, 5(2), 171-180.
Wiersema, M. F., and Liebeskind, J. P., 1995. The effects of leveraged buyouts on corporate growth and diversification in large firms. Strategic Management Journal, 16(6), 447-460.
Williamson, O. E., 1979. Transaction-cost economics: the governance of contractual relations. Journal of Law and Economics, 22(2), 233-261.
Ansoff, H. I., 1957. Strategies for diversification. Harvard Business Review, 35(5), 113-124.
Barney, J., 1991. Firm resources and sustained competitive advantage. Journal of Manage-ment, 17(1), 99-120.
Bausch, A., and Krist, M., 2007. The effect of context-related moderators on the inter-nationalization-performance relationship: Evidence from meta-analysis. Management International Review, 47(3), 319-347.
Bengtsson, L., 2000. Corporate strategy in a small open economy: Reducing product diver-sification while increasing international diversification. European Management Jour-nal, 18(4), 444-453.
Benito, D., Guerras, L. Á., and Zuñiga, J. Á., 2012. Four decades of research on product diversification: a literature review. Management Decision, 50(2), 325-344.
Berger, P. G., and Ofek, E., 1995. Diversification’s effect on firm value. Journal of Financial Economics, 37(1), 39-65.
Campa, J. M., and Kedia, S., 2002. Explaining the diversification discount. Journal of Finance, 57(4), 1731-1762.
Cerrato, D., Alessandri, T., and Depperu, D., 2016. Economic crisis, acquisitions and firm performance. Long Range Planning, 49(2), 171-185.
Chakrabarti, A., Singh, K., and Mahmood, I., 2007. Diversification and performance: evidence from East Asian firms. Strategic Management Journal, 28(2), 101-120.
Chandler, A. D., 1962. Strategy and Structure: Chapters in the History of the American Industrial Enterprise. Cambridge: MIT Press.
De la Fuente, G., and Velasco, P., 2015. The effect of the financial crisis on the value of corporate diversification in Spanish firms. Spanish Journal of Finance and Accounting, 44(1), 1-23.
Denis, D. J., Denis, D. K., and Sarin, A., 1997. Agency problems, equity ownership, and corporate diversification. Journal of Finance, 52(1), 135-160.
Dimovski, V., and Škerlavaj, M., 2005. Performance Effects of Organizational Learning in a Transitional Economy. Problems and Perspectives in Management, 3(4), 56-67.
Elango, B., and Sethi, S. P., 2007. An exploration of the relationship between country of origin (COE) and the internationalization-performance paradigm. Management International Review, 47(3), 369-392.
Forcadell, F. J., 2002. Análisis dinámico de la relación entre diversificación empresarial y recursos tecnológicos. una aplicación a las empresas industriales españolas. Tesis, (Dr). Universidad Rey Juan Carlos.
Gort, M., 1962. Diversification and Integration in American Industry. Princenton: Princenton University Press.
Grant, R. M., 1991. The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation. California Management Review, 33(3), 114-135.
Grant, R. M., Jammine, A. P., and Thomas, H., 1988. Diversity, Diversification, and Profitability among British Manufacturing Companies, 1972-84. Academy of Management Journal, 31(4), 771-801.
Guerras, L. Á., and Navas, J. E., 2007. La dirección estratégica de la empresa. Teoría y aplicaciones. Madrid: Thomson Civitas.
Hair, J. F., Anderson, R. E., Tatham, R. L., and Black, W. C., 1999. Análisis multivariante. Madrid: Prentice Hall.
Huerta, P., Martínez, P., and Navas, J. E., 2004. Cómo medir la diversificación corporativa: Una aplicación a las empresas industriales españolas. Theoría: Ciencia, Arte y Humanidades, 13, 59-68.
Huerta, P., Pedraja, L., Navas, J. E., and Almodóvar, P. A., 2008. Las estrategias corporativas y los resultados empresariales: un análisis por tipo de estrategia corporativa y sector industrial en España. Cuadernos de Administración, 21(37), 61-71.
Imel, B., and Helmberger, P., 1971. Estimation of Structure-Profit Relationships with Application to the Food Processing Sector. American Economic Review, 61(4), 614- 627.
Jensen, M. C., and Meckling, W. H., 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Jerez, P., 2001. La gestión de recursos humanos y el aprendizaje organizativo: Incidencia e implicaciones. Tesis, (Dr). Universidad de Almería.
Jiménez, D., and Sanz, R., 2006. Innovación, aprendizaje organizativo y resultados empresariales. Un estudio empírico. Cuadernos de Economía y Dirección de la Empresa, 9(29), 31-55.
Kuppuswamy, V., and Villalonga, B., 2010. Does diversification create value in the presence of external financing constraints? Evidence from the 2007–2009 financial crisis. Working Paper 10-101. Harvard Business School.
Lubatkin, M., and Chatterjee, S., 1991. The strategy shareholder value relationship: Testing temporal stability across market cycles. Strategic Management Journal, 12(4), 251-270.
Mahoney, J. T., and Pandian, J. R., 1992. The Resource-Based View Within the Conversation of Strategic Management. Strategic Management Journal, 13(5), 363-380.
Markides, C. C., and Williamson, P. J., 1994. Related Diversification, Core Competencies and Corporate Performance. Strategic Management Journal, 15(S2), 149-165.
Mayer, M., and Whittington, R., 2003. Diversification in context: A cross-national and cross-temporal extension. Strategic Management Journal, 24(8), 773-781.
Miller, D. J., 2004. Firms’ technological resources and the performance effects of diversification: a longitudinal study. Strategic Management Journal, 25(11), 1097-1119.
Miller, R. A., 1969. Market Structure and Industrial Performance: Relation of Profit Rates to Concentration, Advertising Intensity, and Diversity. Journal of Industrial Economics, 17(2), 104-118.
Montgomery, C. A., 1982. The Measurement of Firm Diversification: Some New Empirical Evidence. Academy of Management Jorunal, 25(2), 299-307.
Ortega, E., and Peñalosa, J., 2012. The Spanish economic crisis: key factors and growth challenges in the euro area. Banco de Espana Occasional Paper (1201).
Page, D. E., Jahera Jr, J. S., and Lloyd, W. P., 1988. Does Business Diversification Affect Performance?: Some Further Evidence. Quarterly Journal of Business and Economics, 27(1), 130-147.
Palepu, K., 1985. Diversification strategy, profit performance and the entropy measure. Strategic Management Journal, 6(3), 239–255.
Palich, L. E., Cardinal, L. B., and Miller, C. C., 2000. Curvilinearity in the DiversificationPerformance Linkage: An Examination of over Three Decades of Research. Strategic Management Journal, 21(2), 155-174.
Pangarkar, N., and Lie, J. R., 2004. The impact of market cycle on the performance of Singapore acquirers. Strategic Management Journal, 25(12), 1209-1216.
Penrose, E. T., 1959. The Theory of the Growth of the Firm. New York: Wiley.
Porter, M. E., 1987. Ventaja competitiva: Creación y sostenimiento de un desempeño superior. México: Compañía Editorial Continental.
Prahalad, C. K., and Bettis, R. A., 1986. The Dominant Logic: A New Linkage between Diversity and Performance. Strategic Management Journal, 7(6), 485-501.
Prahalad, C. K., and Hamel, G., 1990. The Core Competence of the Corporation. Harvard Business Review, 68(3), 79-91.
Ravichandran, T., Liu, Y., Han, S., and Hasan, I., 2009. Diversification and Firm Performance: Exploring the Moderating Effects of Information Technology Spending. Journal of Management Information Systems, 25(4), 205-240.
Rhoades, S. A., 1973. The Effect of Diversification on Industry Profit Performance in 241 Manufacturing Industries: 1963. Review of Economics and Statistics, 55(2), 146-155.
Ritala, P., 2012. Coopetition strategy–when is it successful? Empirical evidence on innovation and market performance. British Journal of Management, 23(3), 307-324.
Rumelt, R. P., 1982. Diversification Strategy and Profitability. Strategic Management Journal, 3(4), 359-369.
Selling, T. I., and Stickney, C. P., 1989. The effects of business environment and strategy on a firm’s rate of return on assets. Financial Analysts Journal, 45(1), 43-68.
Shayne Gary, M., 2005. Implementation Strategy and Performance Outcomes in Related Diversification. Strategic Management Journal, 26(7), 643-664.
StataCorp., 2009. Stata: Release 11. Statistical Software
Stowe, J. D., and Xing, X., 2006. Can growth opportunities explain the diversification discount? Journal of Corporate Finance, 12(4), 783-796.
Suárez, I., 1993. Fundamentos Teóricos y Empíricos de la Relación entre Diversificación y Resultados Empresariales: Un Panorama. Revista de Economía Aplicada, 1(3), 139- 165.
Suárez, I., 1994. Estrategia de diversificación y resultados de la empresa española. Revista de Economía Aplicada, 2(4), 103-128.
Tanriverdi, H., and Venkatraman, N., 2005. Knowledge relatedness and the performance of multibusiness firms. Strategic Management Journal, 26(2), 97-119.
Teece, D. J., Pisano, G., and Shuen, A., 1997. Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18(7), 509-533.
Varadarajan, P. R., and Ramanujam, V., 1987. Diversification and performance: A reexamination using a new two-dimensional conceptualization of diversity in firms. Academy of Management Journal, 30(2), 380-393.
Villalonga, B., 2004. Diversification discount or premium? New evidence from the business information tracking series. Journal of Finance, 59(2), 479-506.
Wernerfelt, B., 1984. A Resource-Based View of the Firm. Strategic Management Journal, 5(2), 171-180.
Wiersema, M. F., and Liebeskind, J. P., 1995. The effects of leveraged buyouts on corporate growth and diversification in large firms. Strategic Management Journal, 16(6), 447-460.
Williamson, O. E., 1979. Transaction-cost economics: the governance of contractual relations. Journal of Law and Economics, 22(2), 233-261.
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