ABSTRACT
This chapter focuses on the relationship between the level of diversification and firm's performance. As an important objective, the chapter aims for a better understanding of the limits of diversification. It presents how diversification increases a firm's performance up to a point, after which diseconomies of scope reduce its performance. The relationship between diversification and performance has attracted significant research attention in a wide variety of business disciplines. By introducing financial performance into his analysis, Rumelt provided an explicit linkage between a diversification strategy and profitability and offered the key finding that in fact it was related diversification that was superior to unrelated diversification. Firms that diversify into businesses more closely linked to their core activities are more profitable than are those that diversify in less related businesses.
