In “Revisiting the Link Between Product/Industry Diversification and Corporate Performance,” CEIBS Bayer Chair Professor of Marketing Willem Burgers and his co-authors explore the level of impact that a firm’s performance has on its choice of diversification strategy. The paper is co-written by former CEIBS Research Assistant Andy Sun and Assistant Professors of Marketing at the College of Business, Auburn University Dan Padgett and Brian Bourdeau. The report was published in the January 2009 edition of International Review of Business Research.

While earlier works have examined the impact of diversification on firm performance, this latest research paper focuses on the largely unexplored reverse causal link: the impact of firm performance on it’s subsequent diversification moves. “Revisiting the Link Between Product/Industry Diversification and Corporate Performance” breaks new ground by raising questions about the accuracy of the long-held assumption that firms choose to reduce risk through diversification, which then improves performance, especially in transitional economies with high levels of uncertainty. Prof Burgers and his co-authors sought answers to the question: is it possible that performance actually impacts the firm’s diversification strategy, rather than the reverse?

By studying 88 Chinese firms from the Shanghai stock market 180 index during the turbulent years of 1997 to 2001, the authors found that prior performance directly relates to diversification strategy. As a result, prior performance must be factored into any efforts to determine the effect of diversification strategies on a firm’s performance. 
The study offers new insight into the “causal relationships between product diversification and corporate profit and sales growth performance.” According to the study, neither diversification nor specialization emerge as the best strategy for all companies. Instead, individul companies should choose different strategies based on their particular situations, opportunities, and challenges. Specifically, while diversification literature traditionally states that firms perform better as they specialize their activities, this advice must be modified. The authors conclude that poorly performing firms in unattractive industries are more likely to improve their performance by diversification into new industries.