Diversification as a corporate strategy : an assessment of financial performance of industrial companies in South Africa

Abstract

Corporate strategy forms the foundation when considering the strategic alternatives available to an organisation. Corporate diversification and specialisation are two of the more popular configurations often proposed by corporate strategy theory in order to grow and sustain financial performance. The issue of whether or not diversification leads to financial performance has been debated since the early 1950s. Ample research has been conducted from an international perspective. However, the findings have been inconclusive/mixed/inconsistent and there remains a lack of consensus regarding the diversification-performance relationship. This study attempts to provide clarity on the matter by using a quantitative method to assess the financial performance of companies listed on the industrial sector of the Johannesburg Securities Exchange (JSE) for the period 2003 to 2010. Thirty-nine companies met the criteria for inclusion in the sample and were classified as either focused, moderately or highly diversified. Three financial measures were compared for the different categories, namely return on average equity, return on average assets and market return. Two of the three hypotheses are not statistically significant and the differences in the average (mean) performance measures are due to sampling error. One of the performance measures, return on assets, indicates that the difference in the ii average (mean) performance is statistically significant. The pairwise comparisons revealed significant differences between highly and moderately diversified companies as well as between moderately diversified and focused companies. The mean difference between focused and highly diversified companies was not statistically significant. In this regard, moderately diversified companies performed better than highly diversified and focused companies.