Delving into the diversification and performance relationship: Building a more nuanced understanding through the inclusion of new contextual variables

Date of Award


Degree Type

Thesis - ECU Access Only

Degree Name

Doctor of Philosophy


School of Business and Law

First Advisor

Peter Galvin

Second Advisor

Pieter-Jan Bezemer


Over recent decades, the performance benefits of diversification strategies have been the topic of much academic discussion. Conceptually, there has been much debate about the benefits and drawbacks of diversification, and the resulting empirical findings to date have been inconclusive. In this thesis it is proposed that to advance this literature, the conditions and mechanisms that may impact the diversification–performance relationship be considered. The thesis specifically investigates how key unexplored contingent factors shape the relationship between various forms of diversification (i.e., related, unrelated, international, and industrial diversification) and firm performance.

Panel data from the Australian mining and restaurant industries covering the period 2010–2019 are used to test the hypothesised relationships between diversification and firm financial performance and how various contingent factors moderate this main relationship. The thesis is organised around four individual studies, each presenting its own approach to better understand the diversification–performance relationship. Study 1 begins by introducing the argument that companies featuring related strategic business units – i.e., related diversification – operate more correlated business activities and can enhance their performance through synergistic advantages associated with utilising related assets across business units. However, the study posits that companies might only be able to realise these advantages when efficiently organised and when cash flows are volatile. The empirical findings support this suggestion, with related diversification having a baseline negative effect on performance.

Study 2 extends this argument by examining whether the resources that relatedly diversified firms have at their disposal influence the diversification–performance relationship. Following the logic that the sharing of common resources promotes synergistic advantages we investigate whether the realisation of these synergies depends on the level of resources a company possesses. The empirical results show that mining firms featuring related diversification with higher levels of resource intensity benefit the most from pursuing related diversification.

Study 3 explores the impact of time on the diversification–performance relationship by considering how the length of prior experience with diversification results in different performance outcomes. The study theorises that diversified firms will change the scope of diversification over time to achieve competitive advantages, a factor that influences the related performance outcomes. The empirical results confirm that the industrial diversification of restaurants indeed yields a better financial performance when these restaurants have a longer tenure of diversification. However, this is not the case for internationally diversified restaurants; in fact, a longer tenure weakens the performance benefits derived from pursuing this strategy.

Lastly, study 4 contributes to a better understanding of the association between unrelated diversification and company performance by proposing a reconceptualisation of this relationship. Instead of following the majority of the literature in proposing linear relationships and/or exploring critical contingencies, this theoretical study suggests that the main relationship might be non-linear due to the presence of several mechanisms that differently impact company performance at varying levels of unrelated diversification. More precisely, the study discusses how coordination costs affect free cash flows and the related agency problems companies will experience at different levels of unrelated diversification. The joint impact of these factors suggests that the relationship between unrelated diversification and firm performance might be S-shaped, and we discuss the implications this has for future empirical research in this domain.

The overarching conclusion of this thesis is that the diversification–performance link is inconsistent and different approaches are needed to understand this relationship. In each of the three empirical studies a different baseline effect was uncovered, highlighting that there may not be a clear positive or negative effect of this strategy on firm performance. However, all studies showed that the introduction of critical contingency factors help to better understand when firms may still benefit from pursing this strategy. Therefore, this study aligns with the view that the inconsistent relationship between corporate diversification and firm performance is not only due to diversification per se, but largely driven by contingent factors that potentially have competitive advantage for an organisation as well as how these organisations manage these contingent factors within diversification strategy.

The findings of this study have major implications for management of firms, shareholders, and the capital market. Theoretically, this study emphasises that existing theories identified with diversification and firm performance relationships have not adequately defined this relationship, hence the need to use contingent factors for a more nuance understanding.

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