The Effect of Diversification Strategy on Organizational Performance

Abstract

In today’s dynamic and turbulent business environment, diversification has become a catalyst for achieving competitive advantages and the creation of synergy in market operations. This is because manufacturing companies operate in a highly competitive environment, especially among firmsthat produce the same or similar goods. This study examines the effect of a diversification strategy on an organization’s performance in the manufacturing sector. A quasi-experimental study with an ex-post facto research design were used for the study. The respondent populationconsists of thirty-one organizations listed in Nigerian Stock Exchange (NSE) for a period of 20 years (1997-2017), while the sample size is comprised of six organizations purposively selected based on their life-span and level of diversification. Three hypotheses were formulated and tested using ratio analysis, while performance was measured in terms of ROA, ROI and ROE; organization size, organizationvalue and growth; as well asleverage and liquidity. Data was drawn from the financial reports of the selected organizations, with E-View version 9 used for the data analysis. The study revealed that diversified organizations outperformundiversified ones in terms of ROA and ROI. While related diversified organizations were discovered to be positive in terms of ROA (26.8%), unrelated and hybrid diversified organizations were positive in ROE (81.7% and 20.5%). A diversification strategy leads to growth and profitability (20%) and a strong capital structure to cover liabilities (26%). The study concluded that diversification is a strategic tool for achieving strategic relevance and spontaneous performance.

Keywords

• diversification strateg y
• performance
• organization
• profitability
• competitive advantage