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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.
Keywords: diversification strategy, Rumelt, industry effect, related diversification
1. Problem of Rumelt (1974)
Diversification strategy is a key factor of corporate strategy. Those who study diversification at a university will undoubtedly be taught Rumelt's research as the basics in this field. Rumelt (1974), in addition to categorizing diversification strategies, clarified the relationship to company performance for each strategy using data from 246 American corporations.
While only the essence is taught in texts and courses, Rumelt's (1974) conclusions seem to stand on their own. The following are the conclusions that come to mind when considering Rumelt (1974):
1) The analysis showed that the strategies related to higher performance were the Dominant-Constrained (DC) and the Related-Constrained strategies (RC).
2) On the other hand, the Related-Linked (RL) firms exhibited average performance levels, while the Unrelated-Passive (UP) firms exhibited the worst performance.
3)1 Rather than diversifying into technologically unrelated areas, it is better to diversify into businesses close to the company's main business, in which it can utilize its core.
These conclusions are convincing. It is intuitively correct that it is better to diversify into related areas than diversify into unrelated areas. Based on this research, the ideal diversification strategies are the DC and RC strategies.
However, Rumelt (1982), which is his follow-up research of Rumelt (1974), revealed that these two strategies are not necessarily the ideal diversification strategies.
Rumelt (1982) performed the same analysis on data from 50 new companies in addition to the data from Rumelt (1974). The results showed no significant relationship between a DC diversification strategy and high performance...