PurposeThe main purpose of this paper is to introduce a comprehensive model explaining what affects the scope of the firm and also to find out its impact on firm performance.Design/methodology/approachThis paper is based on an empirical analysis of a sample of 312 hardware manufacturing companies in Taiwan.FindingsThe research findings indicate that capability exploitation and upgrading will exert a positive influence on corporate diversification. In addition, corporate diversification will exhibit a curvilinear effect on firm performance.Practical implicationsUnder the logic of capability‐based growth, managers should manage portfolios of capability upgrading and capability exploitation; and then, managers have to conduct econometric analyses to find out a firm's optimal level of corporate diversification for performance maximization.Originality/valueThis study attempts to propose a dynamic capabilities perspective, which suggests that the successful growth of a firm hinges on a strategic logic of capability‐based growth management containing both capability exploitation and capability upgrading, for exploring the antecedents and consequences of corporate diversification.