THE EFFECT OF DIVERSIFICATION STRATEGY ON ORGANIZATIONAL PERFORMANCE

In today’s dynamic and turbulent business environment, diversification has become a catalyst for achieving competitive advantages and the creation of synergy in market operations. This is because manufacturing companies operate in a highly competitive environment, especially among firmsthat produce the same or similar goods. This study examines the effect of a diversification strategy on an organization’s performance in the manufacturing sector. A quasi-experimental study with an ex-post facto research design were used for the study. The respondent populationconsists of thirty-one organizations listed in Nigerian Stock Exchange (NSE) for a period of 20 years (1997-2017), while the sample size is comprised of six organizations purposively selected based on their life-span and level of diversification. Three hypotheses were formulated and tested using ratio analysis, while performance was measured in terms of ROA, ROI and ROE; organization size, organizationvalue and growth; as well asleverage and liquidity. Data was drawn from the financial reports of the selected organizations, with E-View version 9 used for the data analysis. The study revealed that diversified organizations outperformundiversified ones in terms of ROA and ROI. While related diversified organizations were discovered to be positive in terms of ROA (26.8%), unrelated and hybrid diversified organizations were positive in ROE (81.7% and 20.5%). A diversification strategy leads to growth and profitability (20%) and a strong capital structure to cover liabilities (26%). The study concluded that diversification is a strategic tool for achieving strategic relevance and spontaneous performance.


INTRODUCTION
The effect of a diversification strategy on performance has over the decades attracted the attention of scholars in the field of management and social sciences. Nonetheless, the justificationsfor diversification as well as results vary, with some findings found to be inconclusive (Asrarhaghighiet al., 2013). Organizations may choose to diversify to survive the dynamics of business environment (Nyangiri & Ogollah, 2015); for expansion (Su & Tsang, 2015); increase profitabil-ity (Karimi, 2013;Yigit & Tur, 2012); foster efficiency in the use of resources and create investment opportunities (Emel & Yildirim, 2016;Hasby et al., 2017); to achieve economies of scale to exploremarket options and opportunities (Sindhu et al., 2014); and as a turnaround strategy (Harrigan, 2012). Krivikapic et al. (2017) conclude that organizations diversify in order to have a better position in the market, while Akewushola (2015) opined that a diversification strategy enablesan organization to expend its excess resources for economic use. However, subsequent studies have revealed contradictory results, some negative and others finding no relationship among variables (Shyu & Chen, 2009). Diversification does not necessarily lead to improved performance and not all diversified organizations are profitable (Manyuru et al., 2017;Nasiru et al., 2011;Jasper, 2016). Also, an increased diversity within a business portfolio may result in a loss of control by top executives, which also deteriorates business performance (Yigit& Tur, 2012; Uguwany & Ugwu, 2013). Schommer et al. (2019) foundthat the performance of diversified organizations declines with time, and decision makers whoform diversification strategies find it increasingly difficult over time to avoid retrogressive performance.
The increasing demand for product varieties by consumers and theircontinuous substitution has forced organizations to come up with strategies on how to improve performance. Irrespective of opportunities in the business environment, organizations face threats that distort their performance, hence increase the difficulty of survival. This study, therefore, examines the effect of a diversification strategy on performance within themanufacturing sector in Nigeria with these specific objectives: 1. determine the significant variance among related, unrelated and hybrid diversification using the ROA, ROE and ROI measures of performance.
2. examine the significant variance among related, unrelated and hybrid diversification strategies in terms ofsize, value and growth.
3. access the significant variances between leverage and liquidity in terms ofrelated, unrelated and hybrid diversification.
The study was divided into five sections, with section one introducing the subject matter, section two presenting a literature review, section three the research methodology employed for the study, section four the research findings and discussion of the findings, and section five provides the conclusion and recommendations of the study. The study was limited to six manufacturing companies out of the thirty-three companies listed in the Nigeria stock exchange.

THEORETICAL BACKGROUND
Diversification has become a popular survival strategy among organizations in an effort to outpace competitors (Haug & Ultich, 2013). Whether in related form or not, diversification is a strategic option used by more and more managers to improve performance (Castaldi & Giarratana, 2018;Makau&Ambose, 2018). Organizations havechosen from among several available strategic alternatives to make the best use of the available resources to reach predetermined goal sregarding increased performance (Rowe, 2014;Xaxx, 2017).
Diversification is undertakenwhen an organization aims at changing its business definition either by developing new products or expanding into a new market individually or jointly with another entity (Su & Tsang, 2015). It is a catalyst for competitive advantage and a means whereby an organization spreads its risk across several businesses to increase profitability, reduce the risk of bankruptcy, create synergy, enhance market operations and improve performance (Oladele, 2012). A diversification strategy helps in improving debt capacity, asset deployment and further allows the organization to use its existing skills, expertise and competences to produce unique products (Ajayi & Madhumati, 2012; Pandya & Rao, 2011; Junior & Funchai, 2013). Diversified organizations can effectively pool unsystematic risk in order to reduce the viability of operating cash flow to enjoy competitive advantages (Dosi & Teece, 1993). Nevertheless, diversification should not be seen as a panaceathat will meet every single one of the various challenges faced by organizations in today's dynamic business environment.
Zheng-fend & Lingyan (2012) as well as Oladele (2012) have shown howorganizations are exposed to huge risks and structural challenges that can stunt managerial decisionsregardingwhether to spin-off aspects of operationsor to become part of aholding group structure. In addition, Ugwuany & Ugwu (2013) have affirmed that diversification can bevalue-destroying and usually leads to discount as a result of agency problems between managers and shareholders and those averse to taking on managerial risk. It may also result in the weakening of corporate governance structure and family relationships (Alli et al., 2016). Consequently, if not properly planned and implemented, diversification may lead to retrogressive performance, especially in less developed countries such as Nigeria which are plagued with instability, economic uncertainty, incessant shut-downs of economic activities, a lack of technology and resources, as well as deteriorating infrastructure (Haim, 2015; Thompson & Stickland, 2003). Sahu (2017) has concluded that diversification is not a very efficientstrategy to increase an organization's profit and may result inpoor performance, while higher diversification is retrogressive in terms of overall performance. Santarelli & Tran (2016) have presentsimilar opinions regarding these variables.

Theoretical framework
Two theories, Modern Portfolio Theory by Henry Markowitz and the Resource-based view by Birger Wernerfelt, are germane to the present study, which is based on aptitude in the explanation of the dependent and independent variables.
Modern Portfolio Theory (MPT) was introduced to assist in the selection and formation of the most efficient diversified portfolio in order to most greatly reduce risk. MPTis a tool that guides investors on the expected risk and returns associated with investments. At the most basic level, the theory recommendsthat investors should invest in several portfolios rather than rely on a single portfolio, by which investors can reap the benefits of diversification through reduced risk by spreading it among portfolios.
Resource-based theory (RBT) allows an organization to leverage upon its inward capabilities which are rare and inimitable to achieve competitive edge over other organizations. The theory states that all organizations have in their possession several untapped resources with potential that makes them superior over competitors and also enables increased performance when properly combined.

Empirical reviews of the use of a diversification strategy and organization of performance
In the study on the effect of a diversification strategy on organizations' performance, using panel dataset of 68 European retailers from 19 countries between 1997 and 2010; Oh et al. (2014) affirmed that both inter-regional and intra-regional diversification havehorizontal S-curve relationship with performance. However, a subsequent study by Hashai (2015) linked within industry adjustment cost and coordination cost as reasons for the S-Curve. Valis-Boas & Gonzelaz (2015) using Entropy, Tobin-q and Herfindahl indexes highlighted that the S-curve seems appropriate in the measure of diversification and performance because diversification is negatively linked to performance due to organizations' inability to transfer knowledge, negotiable contracts and handle institutional practices in host countries. Moreover, international diversification was deemed harmful to performance. Diversification is fundamental to the success of organization in the face of downturn. To determine the effect of diversification on performance, Akewushola (2015) studied 13 selected ICT firms, concluding that the performance impact of related market diversification is not the same for all organizations and it is largely relative and moderated by the intensity of the ICT usage within organizations. Ayeni (2013) predicted the effects of economic diversification on the development of tourism in Nigeria. The study revealed the positive roles of tourism in development. It concluded that Nigerian economy wouldbe prosperous if it diversified into tourism.
In a study on marketing capabilities and diversification on performance of product manufacturing organizations based in Lagos State, Sulaimon et al. (2015) revealed that a significant relationship exists between market capabilities and organizations' performance while diversification has asignificantly strong impact on performance..Ugwuanyi & Ugwu (2012) sampled 18 banks suing expose-facto research design. The study discovered that diversified banks can pool their internally generated funds and resources to create financial synergy to ensure growth. This corresponds with the Modern portfolio theory since organizations can identify their rare capabilities or channel their resources to produce economic good.
Oyedijo (2012) took a sample of 48 companies made up of 15 specialized, 11 related, 14 unrelated and 8 mixed diversified organizations to study the effect of product-market diversification strategy on corporate financial performance. Nigerian organizations seeking sustainable fast growth and superior performance should pursue related product-market diversification strategy or specialized strategy or both. Oladele (2012) using manufacturing companies listed in Nigerian Stock Exchange revealed that an inverse relationship exists between diversification strategy and performance due to shareholders' influence.

RESEARCH OBJECTIVE, METHODOLOGY AND DATA
The study used ex-post facto research design with the study population of thirty-three (33) Table 1 presents the descriptive statistics for all the organizationssampled to ascertain the appropriateness of the data collected from the financial reports. The table reveals that the measures of performance were all positive (ROA, ROE and ROI).This suggests that over time all the organizations sampled were experiencing high returns on assets, equity and investment.  Table 2 presents a ratio analysis of performance indicators in measuring which of the diversification strategies enhances the organization's performance. Based onthe results, the average ROA of organizations that adopted a related diversification strategy is 26.8%, which is higher than that of a hybrid diversification strategy (22.4%) and unrelated diversification strategy (10.2%).The average ROE of organizations that adopted a hybrid diversification strategy is 81.71%, which is higher than that of a related diversification strategy (14.22%) and unrelated diversification strategy (20.58%). The average ROI of organizations that adopted a hybrid diversification strategy is 53.90%, which is higher than that of a related diversification strategy (12.15%) and unrelated diversification strategy (12.72%).

RESULTS AND DISCUSSION
ROA is more efficient, i.e. it uses related diversification as evidence from the leastcovariance value (0.71850) compared to other measures of performance such as ROE and ROI, which have a higher covariance of 5.0320 and 7.6481 respectively.
Similarly, ROA is more efficient when unrelated diversification is adopted. However, using hybrid diversification, the ROE with the leastcovariance value of 0.6408 is a more efficient measure of performance compared to other two measures. From Table 3, it can be seen thatthe organizations pursuing a diversification strategy have a higher size(16.8%) in terms of total assets. This followsfrom the organizations' extension of existing resources and use of assets to produce more goods in the same line,a strategy which brings competition-enhancing opportunities for transferring valuable expertise, technological knowhow or other capabilities from one line of business to another. Hybrid diversified organizations fared well (15.25%) compared to unrelated diversified organizations (14.4%).
Organisation size is more efficient using related diversification as evidence from the least covariance value (0.074) compared to other measures of performance such as organisation value and organisation growth with a higher covariance of 0.566 and 0.720 respectively.
Similarly, organization size is more efficient when unrelated and hybrid diversifications were adopted. The leverage and liquidity positions of the sampled organizations revealed in Table 4 indicate that organizations pursing an unrelated diversification strategy are highly geared (49.7%), while hybrid diversified organizations have about 46% debt in their capital structure andthe ones witha related strategy have a low gearing ratio (21.3%). This suggests that organizations involved in the related diversification strategy have more equity in their capital structure and less debt, while unrelated diversified organizations have about 49% of their capital structure composed of debt.
Leverage is more efficient using related, unrelated and hybrid diversification as evidence from the leastcovariance values0.508, 0.819 and 0.267 comparedto liquidity, with a higher covariance of 3.707, 1.021 and 1.445 respectively.
From the analysis, it was revealed that related diversifiedorganizations outperform unrelated and hybrid diversified organizations in terms of ROA and ROI through use of their capabilities and assets to attain a competitive advantage, whereas the hybrid diversified organizations generate higher returns in terms of ROEascompared to organizations using other diversification strategies. Hybrid diversified organizations have a higher risk return as comparedthose pursuing a related diversification and unrelated diversification strategy, which exhibited a high level of risk in terms of leverage and liquidity.
The study also showed that organization size is more efficient in the use of a related, unrelated and hybrid diversification strategyascompared to organization value and growth. Although that undiversified companies outperform highly diversified ones in terms of return on assets and profit margin, moderately diversified organizations were found to outperform highly diversified entitiesin terms of return on equity, return on asset and profit margin.

CONCLUSION
It was observed that while diversified organizations outperform undiversified organizations in terms of profitability, market value and shareholder value, there were also periods when these organizations were experiencing dwindling performance since the ROI, ROE and liquidity were found to be unstable and unpredictable for a particularspecified period. Further, organizations pursuing related strategies perform better than unrelated and hybrid organizations. Nevertheless, organizations pursuing a hybrid strategy and unrelated strategy generate higher returns in ROE and ROI.The study concluded that the benefit of diversification outweighs the cost, thusdiversification hasa positiveeffect on an organization's performance.
Based on these findings, it is recommendedthat organizations that wishto achieve economies of scale and redeem theirfinancial position in the face of downturn or decline in the product life cycle should diversify its product lines to better meet customers' demands, as well as to achieve profitability and expansion as well as increase performance, since diversified organizations were found toperform better than the undiversified entities. Furthermore, organizations should identify their rare and inimitable capabilities in order to achieve economies of scale and outsmart competitors. Finally, R&Dcentres should be developed to achieve the most cost-effective channelling of resources, the identification of opportunities as they arise in the business environment, as well as to select other strategic options in the most effective way.