Effect of product diversification on financial performance of selected banks in Kericho town

Abstract

The purpose of this study was to investigate the effects of product diversification strategy on financial performance of a firm. While important insights have been made, prior research has almost exclusively focused on the unidirectional link between product diversification and financial performance. This might represent a crucial omission in the previous literature. The study was guided by Resource based Theory. The perceptions of managers, creditors, and stockholders differ greatly regarding the merits of corporate product diversification. The study employed an explanatory survey design that enabled the study to get information regarding the effects of product diversification on the performance of selected banks within Kericho town. This study was carried out on Commercial Banks in Kericho town. The study targeted all the employees of the Commercial Banks. The sampled population consisted of 140 lower level management, and 43 top level management. The study used questionnaire and interview schedule in data collection. The preliminary survey was undertaken on a similar population to the target population of this study. The findings indicated significant and positive relationship between the vertical product diversification and bank financial performance, horizontal product diversification strategy had positive and significant relationship with financial performance whereas, Conglomerate diversification had positive relationship with firm performance. Further regression results indicated that Conglomerate diversification strategy had highest positive effect on financial performance, vertical product diversification and horizontal product diversification) also had positive significant effect on financial performance. The statistical tests applied in the study corroborate that diversified firms are more risky than non-diversified ones. The study therefore concluded that the increased levels of product diversification have a positive impact on the financial performance of banks. The banks should thus increase the levels of product diversification strategies so as to enhance the performance. The study therefore recommended that the bank diversifies its products and especially focus on the untapped investments which accrue as a result of conglomerate diversification.