The relationship between prior performance and diversification: a study of three industries

The extensive research undertaken in studying the relationship between diversification and performance has been largely inconclusive. There have been a number of reasons for mixed results including heterogeneity of samples, pooling of data, and cross-sectional analyses. One possible way to address these problems is to make comparisons based on homogeneity of samples, or some other well-defined structural variable, and to study firms longitudinally. More than just the statistical analysis, this paper identifies the key role of critical antecedent conditions that affect outcomes from diversification strategies. A sample of 59 firms from three distinctly different industries (food, electronics, and petroleum) are used in this empirical study. Results indicate that statistically significant differences exist when industry homogeneity is maintained and critical antecedent variables are isolated. More importantly, the role of initial conditions and historical performance levels have an important bearing on diversification efforts and subsequent performance.