Competitive Intensity, Diversification and Firm Performance

Abstract

This study investigates the relationship between competitive intensity and diversification. It also considers how the relationship between competitive intensity and diversification is moderated by different technological environments. In addition, the study examines firm performance from different degrees of diversification in response to different levels of competitive intensity across different technological environments. The study proposes that competitive intensity is negatively related with diversification and that this relationship is stronger in more technology intensive industries. It also suggests that firm performance from higher degrees of diversification is better for firms that face lower levels of competitive intensity and that this performance effect is stronger in more technology intensive industries. Using data of 2079 firm-year observations in the United Kingdom manufacturing sector, this study finds support for the prediction that the level of competitive intensity firms face is negatively related with the degree of diversification they exhibit. However, the moderating effect of industries with different technology intensity on the relationship between competitive intensity and diversification is not supported. Nonetheless, the moderating effect of industry technology intensity on the interaction of competitive intensity and diversification on firm performance finds partial support. Higher degrees of diversification lead to better performance for firms that face lower competitive intensity only in more technology intensive industries. In less technology intensive industries, higher degrees of diversification lead to better performance for firms that face higher competitive intensity. These findings have important implications for diversification research. In particular, this study highlights that firm-level competition constrains diversification and that this relationship holds across different technological environments. Yet, in terms of performance, firms that face different levels of competitive intensity gain differently from diversification across different technological environments.