DIVERSIFICATION STRATEGY AND FINANCIAL PERFORMANCE: 
                   AN EMPIRICAL STUDY OF JAPAN’S TEXTILE INDUSTRY 
                              ASLI M. COLPAN AND TAKASHI HIKINO a 
(Kyoto   University,  Institute  of  Economic  Research,  and aKyoto   University,  Graduate  School  of 
Economics and the University of Tokyo, Institute of Social Science) 
                 DIVERSIFICATION STRATEGY AND FINANCIAL PERFORMANCE: 
                      AN EMPIRICAL STUDY OF JAPAN’S TEXTILE INDUSTRY 
                                                        Abstract 
In   the   adversarial    market    environment      that  Japanese     textile  industry    has   long   faced,   the  top 
management   of   the   largest   textile   enterprises   has  adopted   the   key   strategy   of  diversification   into 
new   product   markets.       We   examine   how   the   product   diversification   of   Japanese   textile   firms 
affected   their   financial   performances   from   1979   to   2002.       We   find   that   the   dissimilar   business 
models that the management adopted in terms of diversification yielded contrasting performances. 
The   results   also   suggest   that   the  effects   of   diversification   strategies   varied  over   different   time 
periods.     Ultimately,      when    the   enterprises    attempted    diversifying     their  product    and    business 
portfolios,   it   was   not   the   capability   investments   in   marketing   or   finance   functions   that   would 
nurture     sustainable     competitive      advantages.       Only     the   management’s        commitment        to  the 
distinctive capabilities in technology ensured the firms’ continuous growth and profitability 
                                                     Introduction 
Diversification   has   been   the   primary   strategic   measure   for   economic   adjustments   employed   by   the 
large enterprises in Japan’s matured textile industry, ever since for the macro- and micro-economic 
reasons   the   enterprises   started   experiencing   the   chronic   and   structural   troubles   in   the   1970s.   This 
paper examines the effectiveness in terms of financial outcomes of product diversification strategies 
that   the   Japanese   textile   firms   have   followed   since   the   late   1970s.  As   the   sample   of   the   largest 
companies includes those with different origins and evolutionary patterns, the textile industry of Japan 
is an appropriate ground to test the long-term effectiveness of various elements and types of resources 
and capabilities that the enterprises utilized for diversification measures. 
                                                                                                                             1 
   With a few exceptions (Kodama, 1995, Delios and Beamish, 1999, Gemba and Kodama, 2001) the 
empirical     analyses    of  recent   diversification    measures     adopted    by   th

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