Effects of within-industry diversification and related diversification strategies on firm performance

Abstract

The major objective of this study was to investigate the effects of within-industry diversification and related diversification on short and long-run firm performance in the restaurant industry. Accordingly, this study decomposed Jacquemin and Berry's (1979) traditional related diversification entropy into within-industry diversification entropy and pure related diversification entropy. Further, this study examined the interaction effect of within-industry and related diversification strategies on firm performance. The results of this study suggested that in the short-run within-industry diversification strategies have a negative impact on firm profitability but no significant effect on sales growth. However, the long-run effect of within-industry diversification was significantly positive in terms of profitability but not sales growth. This study also showed that related diversification strategies had a positive and significant effect on profitability in the short-run, which turned negative and significant in the long-run. Further, the interaction model indicated that when the two strategies are simultaneously carried out synergy is quickly realized because efficiency is enhanced. A more detailed discussion of the results is provided in the main body of this paper. © 2013 Elsevier Ltd.