A Model Examining the Effect of Generative Learning on the Relationship between Diversification and Financial Performance

Organizations are trying to attain and sustain competitive advantage in the highly competitive business world settings. It is argued that one of the strategies to achieve competitive advantage is to form learning organizations. Diversification strategies of organizations are important growth decisions managers need to make. In this paper, organizational learning, learning organization, fundamental diversification strategies and the link between learning and diversification in the literature were discussed shortly. Then, the link between them was revisited considering the literature with a schema. At last, a causal model was introduced. Model suggested that When a company decides to expand its operations by adding new products related to existing product line, with the aim of exploiting its existing knowledge base, this company can reach superior financial performance  (financial performance means profitability) through generative learning. When a company decides to grow by adding a new product line irrelevant to existing product lines, with the aim of exploring new knowledge, then through generative learning, this company can introduce or develop new technologies in forms of new products/services, in other words make innovation. Unrelated diversification does not directly provide high financial performance. But gradually, as the innovation gain awareness, it brings in superior financial performance more than related diversification can bring in.