Influence of Diversification Strategies on Performance of Non-Financial Firms Listed at the Nairobi Securities Exchange in Kenya

Abstract

In the presence of current threats to firms’ performance by environmental uncertainty, intense competition and the challenges of market liberalization, firms can diversify to overcome these risks. Diversification is one of the alternative strategies available to managers of organizations who are looking for ways to sustain growth and seek greater profits for their organizations. There are numerous strategies that listed non-financial firms can adopt, however, it is not clear which of these strategies have the greatest influence on profit improvement. Thus, the study was an investigation on the influence of diversification strategies on performance of non-financial firms listed at the Nairobi Securities Exchange in Kenya. The following objectives guided the study; to determine the influence of product diversification strategy, geographical diversification strategy, vertical integration strategy and horizontal integration strategy on performance of non-financial firms listed at NSE in Kenya. Capital structure was used as the moderating variable to examine its moderating effect on the relationship between diversification strategies and firm performance. The study was guided by the following theories; Resource Based View theory, Agency theory, Transaction Cost theory, Ansoff theory and make-or-buy decision. The descriptive correlational survey design was adopted. A census of 45 non-financial firms listed at the NSE was taken. Both primary and secondary data was collected to get the data for analysis. Secondary data was obtained from the audited annual financial reports of these companies for a period of five years from 2011 to 2015. To complement the secondary data semi-structured questionnaires were administered to 135 departmental managers. To analyse the data descriptive statistics, correlation and regression analyses were carried out with the aid of Statistical Package of Social Sciences. The study revealed a significant positive relationship between product diversification, geographical diversification, vertical integration, horizontal integration and performance of listed non-financial firms in Kenya. Its regression analysis revealed that 56.3% of changes in performance of these firms were attributed to the collective use of the diversification strategies. This study concluded that diversification strategies are essential strategies for firms to use in their endeavour to improve on their profit levels. The study also concluded that capital structure significantly moderated the relationship between diversification strategies and performance of listed non-financial firms in Kenya. Based on the findings the commonly used diversification strategy was product diversification. It is therefore recommended that managers and shareholders of the firms that are yet to diversify their product portfolio should diversify to remain competitive and profitable in this turbulent business environment. It is further recommended that management of the listed firms should come up with sound policies to guide them when diversifying.