Diversification Strategy and Practice in Small Firms

Abstract

GEOFFREY ROBSON AND COLIN Gallagher are with the School of Business Management at the University of Newcastle-upon-Tyne, England. Michael Daly is senior statistician at the Department of Employment, England, at the time the paper was written with its Small Firms Division. In this paper, using the United Kingdom file of the Dun and Bradstreet credit rating organisation, the authors examine from a variety of standpoints the effect on small firm performance of either being or becoming diversified. The definition used is that a firm is classified as being diversified if it draws ten or more per cent of its total income from a secondary line of business. The period under examination is from December 1987 to December 1989. In a number of instances marked discrepancy is identified between the empirical findings of the study and the commonly accepted large firm diversification theory. Some hypotheses are put forward to explain the observed behaviour and some broad implications of the study for entrepreneurs are outlined. The major findings, however, was that a diversification strategy may only be useful to those small firms which have first built a strong foundation in their primary line of business; otherwise it is likely to endanger a firm's survival prospects and be a hindrance to future growth.