Analysing the relationship between diversification strategy and firm performance: the role of the economic cycle

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.

The Influence of Perceived Macro Environment on the Competitiveness of Internationalized Medium-Sized and Large Enterprises

“…For indirect relationship research, authors investigated the relationship between firm performance measured by ROA, ROS, labor productivity, etc. (Xiong et al 2020;López-Zapata et al 2019;Forcadell et al 2020;Donbesuur et al 2020 with an international aspect), or turnover, added value, growth of employment in the short-run (Cainelli et al 2022) and factors affecting the organization/business, such as a re-innovation attempt after a failed innovation (Xiong et al 2020), being a member of a national or international business group (Cainelli et al 2022), technological and organizational innovation (Donbesuur et al 2020), the effect of diversification strategy (López-Zapata et al 2019), and the effect of business portfolio restructuring (BPR) (Forcadell et al 2020) where institutional factors were treated as having an indirect or moderating effect.…”

Agency motives and the corporate diversification decision: perspectives of corporate executives in Nigeria

“…Fox and Hamilton (1994) grouped these into stewardship and agency motives. Stewardship motives are those that seek the interest of the firm and its shareholders and are likely to produce positive performance (Dey and Banerjee, 2019; Fox and Hamilton, 1994; García et al , 2013; Ibekwe, 2021; López-Zapata et al , 2019). The agency motives for diversification are those that satisfy the personal interests of the managers and controlling shareholders and are likely to result in negative performance (Fox and Hamilton, 1994; Holmes et al , 2017; Ibekwe, 2021; Purkayastha et al , 2022).…”

“…The continued diversification of firms despite the diversification discount calls into question the motive for corporate diversification (Goold and Luchs, 1993; Hyland and Diltz, 2002). The motive for corporate diversification is crucial for firm performance and sustainability (Dey and Banerjee, 2019; García et al , 2013; López-Zapata et al , 2019; Taĝ, 2017). Some researchers argue that the performance outcomes of diversification are more likely to be negative where managerial self-interest (agency problems) motivate corporate diversification and positive otherwise (Ahuja and Novelli, 2017; Dey and Banerjee, 2019; García et al , 2013; López-Zapata et al , 2019; Taĝ, 2017).…”

“…Investors who invest in diversified firms might benefit more from investing in firms with less concentrated ownership, as the motivation may be principal–principal agency conflicts. As some authors have shown, agency-driven diversification is likely to be value-destroying (Ahuja and Novelli, 2017; Dey and Banerjee, 2019; García et al , 2013; López-Zapata et al , 2019; Taĝ, 2017).…”