What is the Ideal Diversification Strategy?

Reconsideration of Diversification Strategy Research of Rumelt

Abstract

Rumelt (1974), one of the basic researches related to diversification strategy, reveals that Dominant-Constrained (DC) and Related-Constrained (RC) strategies make possible a higher level of corporate performance. However, Rumelt (1982) clarifies that these strategies are not necessarily the ideal diversification strategies, because the industry effect have an influence on the performance of companies in these research. This paper re-consolidates and re-examines the data in Rumelt (1974) to reveal that companies in the particular industry tend to adopt the particular strategy. For example, many of the companies that adopted an RC strategy (Related-Constrained firms), a strategy that was viewed as leading to high performance, were in the drug, chemical, and machinery (except electrical) industries.