Diversification Strategy And Firm Performance

Diversification remains a controversial topic in theoretical circles and also a common strategic choice in various enterprises. We must refer to the history of American firms in order to discuss this issue.Since American companies diversification begun the late19th century, diversification has become a global issue and the United States has gone through five M&A wave. Many large diversified companies were produced in the first four M&A wave. Through the fifth wave of mergers and acquisitions in America, most companies, however, have already given up the diversified business strategy. In the top10American corporations list, all companies are operating in a single business enterprise except for General Electric Company. Whereas in China, the case is different. In recent years, the number of companies involved in diversified business is on the rise. Theorists are quite concerned about this phenomenon. The diversity issues were studied from different perspectives, but the consistent conclusion has not been reached.Compared to studies abroad, China’s researches start late, and are not comprehensive. Currently, the studies of diversification are more related to the entire sample of listed companies, in order to test the effect of the diversification on company performance. The study uses listed companies in an industry as a sample is few.Information services are knowledge-intensive industries, with high research costs and long product development cycle. The reason why business management strategy is particularly important is that the process of marketing products is uncertainty. The industry is supported by the state,which is conducive to business success. But management is the determining factor. We are very concerned about the business strategy of such industry. The research found that diversification is general business strategy in the information service enterprises. The factors which led to the diversification preferences of information services enterprises, and the correlation between the diversification strategy and performance are exactly the problems we want to solve. Above all.this study attempts to expand existing research from the following three aspects. First, this research inspects the effect of diversification on firm performance from the perspective of information services. Information services have turned into a significant share of the public economy, with capital-intensive features. There are still gaps in current research on the industry.Second,we extend the research. Not only study the impact of diversification on firm output, but analyze the determinants of diversification. Both the short-term profitability targets and the long-term growth ones are concerned in studying corporate performance. Third, the research data is innovative.In this study, the40information services company listed before2003are involved. Data consist of short-term output indicators and long-term development ones.Firstly, two diversification cases about representative information service companies (Huawei and Lenovo)are analyzed from a strategic management perspective. Secondly, based on the sample of the companies listed before2003whose data are involved during2003-2011, this thesis tests the relationship between diversification and performance of these firms and the determinants of diversification strategy as well. Empirical results reveal that business profitability targets were not statistically significantly affected by the diversification strategy in the short run, but the company’s growth indicators can benefit from diversification.Furthermore, the authors explore the determinants of corporate diversification. The result reveals that the newly established companies or the State-controlled ones tend to take diversification strategy.