Effects of product – market diversification strategy on corporate financial performance and growth: an empirical study of some companies in Nigeria

Abstract

This study takes diversification research to a new level of analysis by examining the performance of a
sample of Nigerian companies in relation to specialization, related, unrelated and mixed productmarket diversification strategies. It was proposed that firms that pursue related diversification
strategy outperform and grow faster than those that attempt to pursue unrelated diversification
strategy. It was further proposed that firms that pursue related diversification strategy exclusively will
perform better than firms that pursue a mixed (i.e. related and unrelated) diversification strategy.
Using the Panel Regression analytical technique involving correlation, F-statistics and descriptive
statistics, the result of the Fixed Effect test showed that there is a high and positive correlation
between financial performance and growth of firms and related diversification strategy. Related
diversifiers had a relatively higher level of financial performance and growth than unrelated and mixed
diversifiers. A marginal correlation was found between unrelated and mixed modes of diversification
and financial performance and growth. The panel regression analysis showed that related
diversification has a significant impact on performance (p< 0.05) while unrelated diversification has a
negative but non-significant impact on performance and growth. The result of the F-statistics showed
that there were significant performance and growth differences between firms utilizing related
diversification strategies and those utilizing unrelated diversification strategies (F = 147.4405, p
<0.05). The panel model result further confirmed that there is a significant difference between the
performanceand growth of firms using mixed (related and unrelated) diversification strategies and the
performance and growth of firms pursuing related diversification strategy exclusively. A significant
difference was also found between the performance and growth of firms that develop through
unrelated diversification and the performance and growth of firms that remained specialized, with
firms that remained specialized performing better on all parameters and growing faster than those
that develop through unrelated diversification only. The study concludes that the financial
performance and growth of firms in Nigeria are significantly affected by the mode of diversification
used and recommends that Nigerian firms that are seeking a sustainable fast growth and superior
performance should pursue either a related product-market diversification strategy or a specialization
strategy.