The relationship between corporate diversification and organisation perfor Mance has been widely studied in the strategy literature (Christensen and Montgomery 1981; Lubatkin and Rogers 1989; Rumelt 1974, 1982). Although not universally accepted, the general prescription given to firms is that related diversification will lead to superior levels of perfor Mance while unrelated diversification will recognise inferior levels of perfor Mance (Rumelt 1974, 1982). But the issue of causality has not received very much attention (Grant, Jammine and Thomas 1988). The present study will address several questions: What is the effect of a firm's previous perfor Mance on its future diversification? Does diversification determine perfor Mance or does perfor Mance determine diversification? Results suggest that, regardless of strategic type, high levels of profitability may be necessary, but not sufficient requirements for diversification. Likewise, it was found that in certain situations, superior perfor Mance may serve as a substitute for diversification.
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