DIVERSIFICATION, MARKET STRUCTURE, AND FIRM PERFORMANCE: AN EXTENSION OF RUMELT'S MODEL
Abstract
This research joined Rumelt's diversification strategy work with the market share and industry structure research characteristically associated with the industrial organization economists. Firms in six of Rumelt's categories (Single-Business, Dominant-Constrained, Dominant-Linked, Related-Constrained, Related-Linked, Unrelated Portfolio) comprised the sample, and the time frame of the work was 1972-1977. The central question addressed was "Do highly diversified firms differ from less diversified firms in ways other than breadth of product line?" The principal focus of the analysis centered on an examination of the firms' markets and tested the generalized hypothesis that systematic differences in market structure and conditions would accompany various diversification patterns. To the extent that such differences exist, a simply stated diversification-profitability linkage could be misleading. In the first phase of the research Rumelt's firm classifications were updated through 1977. This process produced strong evidence in support of the reliability of Rumelt's classification system. A high amount of inter-rater agreement between the independent classifications demonstrated that the classification judgments were reproducible, even though a large amount of qualitative data entered the decision process. Attempts to reproduce the diversification strategy-profitability linkages were less successful. Generally speaking, F-tests did not reveal significant differences across the six strategy categories. However, a series of t-tests did support performance differences in the direction indicated by Rumelt. Accompanying these differences were significant differences in market share, industry profitability, and concentration at the 20-firm and 50-firm levels. A split on a weighted continuous diversification measure produced similar results: compared to high diversifiers, low diversifiers had higher market shares, were located in more concentrated and faster-growing markets, and enjoyed higher sales growth and profitability. It was also found that some relationships between structural market variables and profitability differed between high and low diversifiers. In conclusion, these results demonstrate that the strategic profiles of highly diversified firms differ significantly from those of less diversified firms. The strength of these conclusions indicate that the relationships Rumelt observed between diversification strategies and firm performance were in part due to these differences. Additionally, the different strategic profiles indicate that distinctive competitive strategies are necessary for managing each kind of firm, while simultaneously suggesting ways by which highly diversified firms might improve their performance.
Degree
Ph.D.
Subject Area
Business community
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