Diversification strategy and firm performance: A study of the restaurant industry

Kwang Min Park, Purdue University

Abstract

This study investigated the effect of diversification on firm performance in the restaurant industry. In prior studies, the theoretical rationales and empirical studies were contradictory. The reasons are thought to be derived from some neglected issues such as the industry-specific characteristics and the linear hypothesis on the relationship between diversification and firm performance. Thus, this study suggested the non-linear hypothesis based on the costs and benefits of diversification strategies under the separation of the level of diversification. This study found that at the low level of related diversification the profit decreases but at the high level of related diversification it increases. On the other hand, at the low level of unrelated diversification the profit increases but at the high level of unrelated diversification it decreases. In terms of the volatility of profitability, at the low level of related diversification the volatility increases but at the high level of related diversification it decreases. However, the volatility decreases at the low level of unrelated diversification but it increases at the high level of unrelated diversification. Contrast to the traditional diversification hypothesis, restaurant firms could not benefit from the low level of related diversification. It is thought that the related businesses of restaurant firms are relatively unprofitable and then at the low level of related diversification the costs of related diversification dominate benefits from the related diversification strategy. Thus, this study examined other benefits of related diversification. We found that the most frequently diversified business is the franchising segment, which is the related diversification. From the variance and covariance of sales between the primary and diversifying businesses, we found that the franchising business is very efficient for decreasing the revenue volatility. The academic contribution of this study is to examine the non-linear effect of diversification strategies on the profit and risk under controlling the endogeneity and firm-specific effect. Practically, this study contributed on the hospitality industry-specific effect of diversification strategies on firm performance.

Degree

Ph.D.

Advisors

Jang, Purdue University.

Subject Area

Management

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