The Impact of Diversification Strategy on Financial Performance: A Case of Energy and Petroleum Companies Listed in the Nairobi Securities Exchange

Abstract

The general objective of this study was to determine the impact of diversification strategy on financial performance of energy and petroleum companies listed in the Nairobi Securities Exchange. This study was guided by the following specific objectives; to determine the impact of conglomerate diversification strategy on financial performance of energy and petroleum companies listed in the Nairobi Securities Exchange, to determine the impact of horizontal diversification strategy on financial performance of energy and petroleum companies listed in the Nairobi Securities Exchange and to determine the impact of concentric diversification strategy on financial performance of energy and petroleum companies listed in Nairobi Securities Exchange. This study relied on descriptive research design since it enabled the researcher to clearly present a clear picture and present an empirical assessment, numerical data, and statistical analysis of the collected data. The population consisted of 153 managers yielding a sample of 111 respondents working in four listed companies under energy and petroleum these include Total Kenya Ltd, KenGen Ltd, Umeme Ltd and Kenya Power and Lighting Company Ltd. Stratified sampling technique was used in this study. A questionnaire was used for collecting data from the respondents. Descriptive statistics was used for analyzing frequencies, percentages, means and standard deviations whereas inferential were then used to analyze correlation and regression analysis. A statistical Package for Social Sciences (SPSS) version 24 was used to carry statistical analysis. Tables and figures were used in highlighting findings gathered from the respondents. The first objective of this study aimed to determine the impact of diversification strategy on financial performance. The findings revealed a significant and positive association between conglomerate diversification strategy (independent variable) and financial performance (dependent variable), r (0.446); p-value < 0.01. The second objective sought to determine the impact of horizontal diversification strategy on financial performance. The findings showed a significant and positive relationship between horizontal diversification strategy (independent variable) and financial performance (dependent variable), r (0.937); p-value < 0.01. The third objective sought to determine the impact of concentric diversification strategy on financial performance. The findings showed a significant and positive relationship between concentric diversification strategy (independent variable) and financial performance (dependent variable), r (0.734); p-value < 0.01. This study concludes that there exists a statistically significant relationship between conglomerate diversification strategy and financial performance. Conglomerate diversification strategy influences financial performance in a sense that the business attempts to expand its growth by tapping into different markets to increase their revenues. Conglomerate diversification strategy allows the organization to appeal to new customers. This study concludes that there is a positive and significant association between horizontal diversification strategy and financial performance. Horizontal strategy allows the organization to involve the extension of products or services above and beyond the industry in which the organization operates to increases its market share. Horizontal diversification strategy enhances company reputation which will essentially translate into sales as well as customer loyalty since a firm introduces into the production new products that are based on know-how, experience and technical-economic capabilities in the organization. This study concludes that there is a positive and statistically significant relationship between concentric diversification strategy and financial performance. Concentric diversification strategy allows the business to achieve large goals with smaller working resources and less of a financial cost incurred in the process. This study concludes that horizontal diversification strategy allows the organization to develop new products or services to enter one or more new markets. This study recommends that energy and petroleum firms should attempt to enter into new markets by adding new products and services that are significantly unrelated with no technological or commercial similarities to enhance their market share and ultimately enjoy economies of scale. Energy and petroleum firms should attempt to diversify into automobile parts by offering their customers with essential spare parts to enhance customer conveniences. This study recommends that energy and petroleum firms should focus on providing new and unrelated products or services to their existing consumers. The firms may choose to diversify into restaurants and fast-food restaurants to tap into their existing customer base. This will allow the firms to gain more revenues from these ventures since they already have an established customer base. This study recommends that energy and petroleum firms can diversify in adding new products to the existing products that are in similar markets and will serve similar customers through the same distributions system. For instance, producing engine oils to serve the similar customers through the same distribution system.