2.0 Chapter 2 - Literature Review

2.1 Introduction to Chapter

In this chapter, a literature review will be presented about various concepts and matters that are

related to the research topic, in particular the Malaysian pewter industry, the industry analysis

concept and diversification strategies. Opinions of scholar’s academicians and practitioners are

presented, compared and analyzed.

2.2 A Brief of History of Pewter

Pewter can be traced back to the Roman Empire and artifacts which were found in ancient

Egyptian tombs suggested that pewter existed as early as 1300 B.C. It is said that the use of

pewter utensils was very prevalent during medieval Europe. Even though pewter utensils were

initially utilized by the rich households so as to replace wood and other types of coarse pottery, it

is noted that pewter had become one of the most common materials which were suitable for daily

use in most households. Among the more common pewter utensils used are plates, bowls, spoons

etc. Towards the end of the 17th century, all around America and many parts of Europe, the

popularity of pewter as a tableware stated to decline steadily as new materials like porcelain,

glass and earthenware started to become more popular. However, pewterware continues to be a

sought after item by certain people who value the quality and uniqueness of pewter (Hull, 1992).

2.3 Description of the Composition of Pewter

Pewter is essentially an alloy of tin and in the Middle Ages, the composition of pewter comprises

of 65% to 75% tin, 20% to 30% lead and very small quantities of copper. At one time, the lead

content in the pewter alloy caused pewter items to easily tarnish and this gave it an unappealing

appearance. In addition, lead can separate very easily from alloy and contaminates drinks or food

stored in pewter containers like beer mugs, bowls and plates. This toxic nature of lead raised the

alarm among pewter consumers and this had a detrimental effect on the demand for pewterware.

During the 1770’s, English pewter makers introduced a new invention comprising of a new

pewter alloy known as Britannia metal and this consisted of tin, copper as well as antimony as an

effective replacement for lead. This alloy essentially became the standard pewter alloy. Pewter of

high quality contains 84% tin with very small amounts of copper and antimony. Because tin was

found in great amounts in Malaysia, it is appreciated that Malaysian pewter was capable of

exceeding the set standard and Malaysia was capable of producing finer quality pewter that has

97% tin and small quantities of copper and antimony. The tin which is used to make Malaysian

pewter is said to be refined Malaysian Straits Tin that is 99.85% pure. Even though the content

of tin essentially determined the overall quality of pewter, it is appreciated that copper and

antimony were necessary additives in order to make tin, which is originally a soft and highly

brittle metal, to become harder and malleable.

2.4 Historical Perspective of the Malaysian Pewter Industry

The Malaysian pewter industry commenced in the 19th century when Malaysia was under British

rule and the British had exploited very large resources of tin in Malaysia in order to meet the

growing demand for tin by the industries in Britain at that time. As years went by, the Malaysian

tin industry started to expand and Malaysia soon became the largest tin producer in the world

until the 1980’s. In addition to tin, there was also a demand for pewter from England. However,

the demand for pewter within Malaysia was very low and this was because pewter was not part

of Malay culture or tradition. Also, the skills of pewter-making were always confined to the

pewterer in question and were passed down to members of the pewterer’s family members.

Hence, the Malaysian pewter industry was not able to expand very easily (Yee, 2004).

The first pewterers who managed to capitalize on the small demand for Malaysian pewter were

an immigrant pewtersrnith family who came from China and who had established a pewter

business in the Malaysian state of Selangor. This was the Yong family, who was the very first

pioneers of the famous Selangor Pewter. This business was established in year 1885 and has

since become the leading pewter company in Malaysia and is synonymous with the Malaysian

pewter industry. The Yong family was of a Malaysian-Chinese origin and exemplify Malaysia's

migrant ethos, that entrepreneurial flair together with a higher level of discipline and hard work,

is capable of creating a rags to riches story. The Yong family’s story has essentially become a

modern-day morality tale which is beloved by ethnic Chinese in Malaysia. Yong Koon launched

the nation’s only non-state-supported global brand. Selangor Pewter. This company managed to

become the largest maker of high-quality pewterware in the world and is well known for hiring

the world's finest designers to effectively cement their brand in the local and international arena

(Yee, 2004).

After the conclusion of the British rule in 1957, the demand for pewter continued from the

former British residents and in consequence, the local Malaysian pewter companies started to

export pewter products to England. When these companies started to acquire more experience

within the export market, they commenced exploring the markets in Europe where demand for

pewter was high. Towards the 1970’s, the Malaysian pewter industry was essentially export

driven and many local companies started to produce high quality pewter products which were

capable of meeting the preferences and tastes of customers from a variety of international

markets. In 1987, the Malaysian economy recovered from its recession and there was an increase

in the standard of living and purchasing power among Malaysians and this enhanced the demand

for gifts and souvenirs made of pewter (Yee, 2004).

Even until this day, the Royal Selangor, the main company in the Malaysian pewter industry, is a

family-managed business and a tightly held private company. This is a company that has endured

a world war, British rule and also the Japanese occupation to emerge as an impressively viable

entity at the time when Malaysia gained independence in year 1957. The Malaysian government

has provided help to Royal Selangor, such as the USD 150,000 loan it approved to the company

for expansion in 1962 and also the providing of technical expertise in the form of consultants

from organizations like the International Labour Organization (Yee, 2004).

2.5 The Main Pewter Companies in Malaysia

As noted above, the main pewter company in Malaysia is Royal Selangor but there also exists

other pewter companies in Malaysia which sell pewter using their own specific brands. These

companies include Penang Pewter & Metal Arts Sdn Bhd, Oriental Pewter Sdn Bhd, Zatfee Sdn

Bhd and Selex Corporation. JS is a new pewter company in Malaysia which produces generic

pewter items that are custom-made for marketing agents or individual orders. Besides Royal

Selangor, the other Malaysian pewter companies are niche players and are now as well known

among Malaysians when compared to Royal Selangor. These companies have established their

very own markets in the locality in which they are operating. Companies such as Penang Pewter

and also Oriental Pewter essentially serve markets in the northern states in Peninsular Malaysia

whereas JS serves consumers from the state of Melaka while Zatfee and Selex serve customers in

KL and Selangor. Many of these companies have also ventured into export markets.

Yee C 2004 “Born and Bred in Pewter Dust: The Royal Selangor Story” Far Eastern Economic

Review

2.6 Analysis of the Pewter Market in Malaysia

The market for pewter in Malaysia is comprised of a number of a number of groups, namely

corporate purchasers, tourists and the gift market. Practically speaking, the corporate purchasers

of pewter in Malaysia include private companies, various government agencies, sports and

recreation clubs, association and also a variety of non-profit organizations. The increased level of

prosperity among many Malaysian companies has led to an increase in the degree demand for

high end gift items. Such companies have a tendency to give away high-end gifts and souvenirs

to valued customers. The next significant market segment within the Malaysian pewter market

comprises of tourists as well as foreign visitors in general. This particular consumer segment was

essentially characterized by impulse buying, although there are certain foreign purchasers that

had planned their purchase of pewterware before their visit to Malaysia. These consumers are

known to make very large purchases of the product and this required the pewter company in

Malaysia to make a special shipment of pewter to the customer’s home country. Tourists in

Malaysia are known to show a preference for low- to medium-priced pewter souvenirs that

exhibit cultural motifs so as to commemorate their visit to Malaysia. In addition, Malaysians are

also known to purchase pewter as gifts for their friends and acquaintances and among

Malaysians, pewter is positioned as an essentially high-end gift item and was a popular gift for

special occasions like birthdays, anniversaries and weddings.

Malaysian pewter is also exported overseas to meet the international demand for pewter. Ever

since the 1960’s, Malaysian pewter has been widely exported to places like Japan, Singapore,

Australia as well as the United States. Pewter from Royal Selangor is known to export around

60% of its production directly to 20 countries around the world and around 15% were exported

indirectly via foreign visitors.

Even though the Malaysian pewter industry is not identified as a priority industry for

development in accordance with the Industrial Master Plan, however, it is apparent that a pewter

company in Malaysia could enjoy a number of significant privileges that would normally be

provided to any manufacturing organization in Malaysia. These kinds of privileges come in the

form of tax allowances for capital expenditure when it comes to the expansion of a production

facility or in research and development activities. There are additional incentives that are made

available to companies which export and promote their products overseas. It is appreciated that

the availability of these sorts of incentives, together with a high level of demand for pewter in the

foreign market, has motivated Malaysian pewter companies to concentrate more catering to the

export market. The other factor which induces Malaysian pewter companies to export is the

reduced tariff rates. In consequence of this, Malaysian pewter has become more competitive in a

number of foreign markets as opposed to countries that do not have the most favored nation

(MFN) status.

2.7 Marketing Practices in the Malaysian Pewter Industry

The marketing practices within the Malaysian pewter industry are now examined.

2.7.1 Pricing

Since Royal Selangor is the leader in the Malaysian pewter industry, this company is the one

which sets the prices of Malaysian pewter. Royal Selangor pewter is sold at standard prices all

over Malaysia in order to maintain its perception of high quality as well as to make sure that

retailers refrain from undercutting prices or providing unnecessary discounts. Other pewter

companies in Malaysia are known to base their pricing on the prices set by Royal Selangor and

these companies are known to price their products a little lower in order to ensure they are able

to gain a share within the market. Such a strategy of pricing would ensure the continued

existence of these companies in the industry.

2.7.2 Distribution

At the conclusion of year 1992, Royal Selangor had managed to establish around 40 pewter

showrooms in major towns and cities in Malaysia. These are the best markets due to the very

large presence of government agencies and institutions and also various private companies and

tourist attractions. The showrooms are equipped with all kinds of engraving facilities and

companies like Royal Selangor are known to carry out pewter-making demonstrations for

tourists. In these showrooms, the pewter items are displayed openly to customers in order to

enable the customers to have closer look at pewter item. In places in Malaysia where Royal

Selangor does not have its showroom, Royal Selangor has its 250 authorized retailers, such as

various giftware outlets and book stores, to market their products. In these outlets, Royal

Selangor pewter is sold together with other pewter brands and this provides the customer with

the chance to make comparisons between Royal Selangor pewter and those of various other

pewter companies. In a number of foreign markets, Royal Selangor has established their own

outlets and representative offices, such as in Singapore, Australia, Japan, Hong Kong, Denmark

and Switzerland. There are around 2,500 agents and distributors of Royal Selangor pewter

overseas.

2.7.3 Promotion

In order to acquire international exposure, pewter companies from Malaysia were known to take

part in exhibitions and trade shows, and this was particularly in international gift fairs. There are

a number of fairs that are held in a number of major cities around the world all year around. Fairs

like the Toronto Gift Fair, the Formland Fair in Denmark, the Birmingham Fair and the Frankfurt

International Gift Fair are known to provide pewter companies with the chance to market their

products to major retailers within the giftware industry. Royal Selangor have made heavy

investments when it comes to export promotions by its consistent participation when it comes to

international trade fairs and this has been the case since the 1980’s. Companies like Royal

Selangor have managed to maintain a permanent stand at international fairs around the world. By

participating in exhibitions and trade shows, pewter companies from Malaysia are able to

evaluate their own positions within the industry. These pewter companies are taking advantage

of these occasions in order to keep updated with the designs of the competitors as well as to

locate new ideas when it comes to designing their own pewter related products.

2.8 Malaysian Pewter Industry Analysis Using Porters Five Forces

It is opined that the economic structure of an industry, such as the Pewter industry, is highly

complicated and it is said to be the result of long-term social trends as well as economic forces.

However, its effects on a firm like Royal Selangor are quite immediate as it helps in determining

the competitive rules and strategies which the business is likely to implement. Learning about the

economic structure of the industry is helpful in providing useful insight for business strategy.

Michael Porter made an identification of 5 forces which are used widely to make an assessment

of the structure of any type of industry. The five forces identified comprise of the following:

1. Bargaining power of suppliers

2. Bargaining power of buyers

3. Threat of new entrants

4. Threat of substitutes

5. Rivalry among competitors

These will now be analyzed from the perspective of the Malaysian Pewter industry.

2.8.1 The Bargaining Power of Suppliers in the Malaysian Pewter Industry

Like any other business, companies in the Malaysian Pewter industry would require inputs such

as labor, raw materials and services and the cost of the inputs are likely to have a very significant

impact on the profitability of companies like Royal Selangor. The question of whether the

strength of the suppliers does effectively represent a weak or a strong force is dependent on the

amount of bargaining power which can be exerted and how they are capable of influencing the

various terms and conditions of the transactions to be in their favor. The fact is that suppliers

would be more likely sell their products and services at the highest price possible or to provide

services which are necessary and not more. In the event the bargaining power of suppliers is

weak, then the organization in question might be able to negotiate a more favorable business deal

for themselves. In contrast, if the bargaining power of suppliers is strong, then the business

would be placed in a weaker position and might have to pay a much higher price or be compelled

to accept a much lower level of quality of the product or service.

2.8.1.1 The Factors Affecting the Bargaining Power of Suppliers in the Malaysian Pewter

Industry

The suppliers in the Malaysian Pewter industry are known to have the most bargaining power in

a number of instances which are discussed now. Firstly, it is said that the bargaining power of

suppliers is high when the input or inputs which are required by the business are only available

only from a very small amount of suppliers. The second instance when the supplier bargain

power is high is when the inputs which are required by the business are very unique and hence

making it very costly to change suppliers. The third example of a situation when the bargaining

power of the suppliers is high is when the input purchases do not represent a very significant part

of the supplier’s business. In the event the supplier is not highly dependent on the company it is

supplying, the company in question would have less power to negotiate with the supplier.

Another example of when the suppliers bargaining power is high is when the supplier has the

option to sell directly to the customers, hence bypassing the need for doing business with the

company. The next situation when the supplier bargaining power is high is when the company in

question faces difficulty to change to another supplier.

2.8.1.2 The Level of Suppliers Bargaining Power in the Malaysian Pewter Industry

To explain the supplier bargaining power in the Malaysian pewter industry, the example of the

Royal Selangor company will be used. Royal Selangor is in the business of manufacturing

pewterware and hence would require raw materials like tin and minor quantities of copper and

antimony (Hull, 1992). These materials, especially tin, are available in abundance in Malaysia

and so are the other minor components such as copper and antimony. Hence, it cannot be said

that the inputs required to make pewter are unique. In addition, there are a large number of

suppliers of tin and other metals required in the pewter production process. Thus, it can be said

that the bargaining power of suppliers in Malaysia is quite low.

Hull, C (1992), Pewter, Osprey Publishing,

2.8.2 Bargaining Power of Buyers in the Malaysian Pewter Industry

The bargaining power of buyers makes a description of the effect that customers would have on

the overall profitability of the business in question. A transaction between sellers and buyers

would essentially create value for each of the parties in question. However, in the event the

buyers are having a higher degree of economic power, the ability of the company to capture a

higher proportion of the value created would significantly decrease and the organization would

earn much lower profits.

2.8.2.1 The Factors Affecting the Bargaining Power of Buyers in the Malaysian Pewter

Industry

Buyers seem to have a higher degree of bargaining power in a number of situations. Firstly,

buyers are likely to have a high degree of power when the buyers are very large and they have

purchased much of the company’s output. In the event the business organization sells to a limited

number of very large buyers, they would have very significant leverage to be capable of

negotiating for lower prices and also various other favorable terms and this is primarily because

the threat of losing an important buyer would placed the business organization in a weak

position. The buyers would also have significant power when they are able to play the suppliers

against one another.

Another situation when the buyers have high bargaining power is when there are a large number

of small companies that are supplying products and the buyers are very few and large in size. For

instance, a business organization might not have much bargaining power if the organization in

question and several other competing companies want to sell the same kind of products to one

sole and very large buyer. Another situation when the buyers seem to have a higher degree of

bargaining power is when the products represent a significantly large expense for the customers.

Buyers would have a higher degree of bargaining power when the product is not unique and

could easily be purchased from other suppliers. In the event that the company’s brand is

homogenous in nature or similar to other brands in the market, the buyers would likely to base

their decisions on price. The bargaining power of buyers is also high when the buyers switch

easily and with minimal cost.

2.8.2.2 The Level of Buyer Bargaining Power in the Malaysian Pewter Industry

The bargaining power of buyers in the Malaysian Pewter industry is low and this stems from a

number of reasons. Firstly, the product in question is unique and cannot easily be purchased from

other suppliers. As noted before, there are just a handful of companies that sell pewter in

Malaysia and the most significant one being Royal Selangor. If one were to look at the prices of

the pewterware offered by Royal Selangor, it would become apparent that the prices of their

products are quite high but customers still buy pewter from them and this is due to the fact that

customers do not have much of a choice. They can choose to purchase the pewter from a

competitor of Royal Selangor at slightly lower prices but they would have put up with lower

quality peweter in terms of design and composition. Hence, a customer wanting high quality

pewter would have to purchase from Royal Selangor and pay the price which the company sets.

This shows that buyers do not have a very high bargaining power in the Malaysian pewter

industry, simply because pewter is a unique product and there are only a small number of

organizations selling pewter, while the customers are numerous

2.8.3 Threat of New Entrants in the Malaysian Pewter Industry

It might be the case that a company might have the market essentially cornered with their

product but at the same time, the company’s success might have the outcome of inspiring others

to enter the business as well as to challenge the position held which is being held by the

company. The threat of new entrants essentially involves the possibility that new companies

might make an entry into the industry. The fact is that new entrants would have a quest to

acquire market share and they are known to have significant resources. The presence of such

competitors might have the effect of forcing prices down and this places pressure on profits.

Making an analysis of the threat of new entrants essentially involves analyzing the barriers to

entry and also the expected reactions from existing firms to new competitors. In essence, barriers

to entry involve the costs and the various legal requirements which are required to make an entry

into a market. Such barriers have the effect of protecting these companies which are already in

the process of being a hurdle to other firms trying to make an entry into the market.

2.8.3.1 Factors Affecting the Threat of New Entrants in the Malaysian Pewter Industry

The threat of new entrants would be the greatest in a number of circumstances. The first of these

is when the processes do not have protection from regulations or patents. In comparison, when

there is a requirement for licenses and permits in order for a company to do business, like the

alcohol industry, the existing companies do have a certain degree of protection from new

entrants in the industry. The next circumstance when new entry is high is when the customers do

not exhibit much brand loyalty. When there is weak brand loyalty, potential competitors would

not have to spend much time in order to overcome the advertising and service programs launched

by the existing firms and they are much more likely to make an entry into the industry. Another

situation when the threat of new entry is high is when the start-up costs are low when it comes to

new businesses making an entry into the industry. The lesser the level of commitment required

when it comes to advertising, capital assets and research and development, the higher the chance

of new entrants coming into the industry.

The next situation of high threat of new entrants would be when the products which are provided

are not unique. In the event the products comprise of commodities and when the assets that are

used to produce them are very commonplace, then it is likely that firms would be increasingly

willing to enter the industry as they know they can liquidate their inventory and assets very

easily if the venture does not succeed. The overall threat of new entrants is also high when the

switching costs in the industry are low. When the production process can be very easily learnt,

entry is much easier. The fact is that competitors would be easily attracted to an industry where

the production process is easily learned.

2.8.3.2 The Level of Threat of New Entry in the Malaysian Pewter Industry

In the Malaysian pewter industry, the threat of new entrants is medium to low. This is because of

a number of reasons. Even though there are no specific restrictions placed on new entrants to the

pewter industry by the Malaysian government, other factors serve to create high entry barriers.

One of these is brand loyalty. For decades, customers in Malaysia and internationally have

associated Malaysian pewter with Royal Selangor. This is because Royal Selangor has a long

history of providing pewterware of high quality to customers and they have created a brand name

that is firmly entrenched in the minds of customers. Hence, a new entrant might have difficulty

to attract customers who have already developed a very strong degree of loyalty to existing

pewter manufacturers like Royal Selangor. Another reason why the threat of new entrants is low

is because the product in question is unique. Even though the raw materials required to

manufacture pewter in Malaysia are found easily and in abundance, nevertheless, the methods

and techniques used to design and manufacture pewter are not easy to master and involve an art

which is normally passed down in the family hierarchy, as it is the case of Royal Selangor.

2.8.4 Threat of Substitutes in the Malaysian Pewter Industry

The fact is that products from one business are capable of being replaced by the products from

other competitors. If the company produces a commodity product which is highly

undifferentiated, customers are capable of switch easily from one company’s product to the

product of another competitor with minimal consequences. In comparison, there can be a certain

distinct penalty when switching if the product being offered is unique in nature or if very

important to a customer. In essence, substitute products are the products that can fulfill the same

requirements which are fulfilled by the product of the company in question. A threat would exist

in the event there are alternative products offered at lower prices or which can provide enhanced

performance.

2.8.4.1 Factors Affecting the Threat of Substitution in the Malaysian Pewter Industry

The overall threat of substitutes are great in a number of circumstances are present. The first of

these circumstances is when the product does not provide genuine benefits in comparison to

other kinds of products. The next circumstance is where it is easy for the customers to switch.

For instance, a grocer can very easily change from using paper bags to plastic bags when packing

groceries for its customers. However, it is not easy for a bottler to change from aluminum cans to

plastic bottles as the bottler would have to reconfigure their equipment and to retrain their

employees to use the new equipment. The next circumstance is when the customers do not have

much loyalty and when the price is the main motivator of the customer, the overall threat of

substitutes would be much greater.

2.8.4.2 The Level of Threat of Substitutes in the Malaysian Pewter Industry

In the Malaysian pewter industry, the threat of substitution is high. Even though pewterware is

very attractive and unique in nature, there are other substitutes which are equally attractive, such

as items which are made of various other metals. One of the main substitutes of pewter is

stainless steel items and these are much cheaper and easier to manufacturer in comparison to

pewter. Also, since pewter is more expensive than stainless steel, customers would always have

the option to purchase items made of stainless steel if they feel that prices of pewter are too

expensive.

2.8.5 Rivalry Among Competitors in the Malaysian Pewter Industry

Due to the fact that companies within an industry are said to be mutually dependent, the acts of

one company would generally provoke retaliation from competitors. The level of rivalry among

the competitors in an industry is the strongest of the 5 competitive forces but it is capable of

varying quite significantly among different industries. In the event the competitive force is not

strong enough, companies would increase their prices or they can provide a reduced quality or

quantity for a product in question for the same price as before and it would earn more profits. In

the even the competition is very intense, companies might be required improve their product

offerings in order to retain customers and prices could fall below the break-even levels.

2.8.5.1 Factors Influencing Rivalry Among Competitors in the Malaysian Pewter Industry

The level of rivalry among competitors is very high in a number of situations. The first situation

is when one firm or a few small firms have an incentive to become the leader in the market.

There are cases whereby an industry with 2 or 3 dominant companies might experience very high

degree of rivalry when these companies are fighting to achieve the status of market leader.

However, in the event that competitors that have very diverse strategies and relationships are

having differing goals, rivalry is likely to become more intense. The next situation is when the

market is slowly growing or is shrinking. It is said that when the potential to sell products

becomes stagnant or starts to decline, the firms would be unable to achieve market growth

without taking the market away from competitors. In such a situation the rivalry is likely to

become more intense. Rivalry can also be high when the products are not unique and

undifferentiated products would compete mostly on price as consumers would receive the same

value from products which are produced by different firms (Pandya and Rao, 1998).

2.8.5.2 The Level of Rivalry in the Malaysian Pewter Industry

In the Malaysian pewter industry, the threat of rivalry is low. Although the presence of a number

of companies in the industry would suggest that the level of rivalry might be high, however, in

reality, the industry is dominated by Royal Selangor and it is this company that sets the pricing

of the industry. The other companies merely follow the steps of Royal Selangor and price their

products a little lower to attract customers. Other pewter companies are unable to compete with

Royal Selangor simply because of their brand recognition, marketing capabilities and

manufacturing techniques. However, as new companies like JS start to gain popularity, it is

likely that Royal Selangor might react with price cuts and enhanced differentiation in order to

maintain their dominant position, hence increasing the level of competitiveness in the industry

(Pandya and Rao, 1998).

2.9 Analysis of the Concept of Diversification

Research carried out on the subject of corporate diversification is a very common feature within

the realm of strategic management research. It involves a very unique core of fast growing

literature and together with concepts like synergy (Ansoff, 1965), distinctive competence (Hitt

et al, 1982) and generic strategies (Porter, 1980), the concept of diversification and diversity

occupy a prominent position within the language and literature in the strategic management

sphere. Diversification also features prominently as a key variable in a large number of studies

that emphasize other aspects of strategic management, such as reorganizations, foreign ventures,

top management decision-making, managerial determinants of organizational performance and

so on (Pandya and Rao, 1998).

2.9.1 Defining Diversification

The review of literature on the subject of diversification suggests that there is a very significant

amount of variations in how diversification is defined, conceptualized and measured. According

to Gort (1962), diversification is the 'heterogeneity of output which is based on the total number

of markets which are served by that output in question. On the other hand, Berry (1975) claims

that diversification essentially represents an overall increase in the total amount of industries in

which firms are said to be active. Academicians Kamien and Schwartz (1975) defined

diversification being the total extent that firms which are classified within one industry are

known to produce goods that are classified in another industry.

More recent definitions of diversification seem to place focused on the multidimensional nature

of diversification. For instance, the research carried out by Booz, Allen and Hamilton defined

diversification as the method of spreading the foundation of a business in order to successfully

achieve enhanced growth and also to reduce the overall degree of risk (Booz et al, 1985).

According to Ramanujam and Varadarajan, (1989), diversification involves the entry of a

firm or particular business of a firm, into new lines of activity and this is accomplished either by

the processes of internal business development or via acquisition and which involves changes to

the firm’s administrative systems, its structure and various other management processes (Pandya

and Rao, 1998).

2.9.2 Analyzing the Link between Diversification and Firm Performance

As noted from the analysis above, diversification is the means by which a firm would expand

from its main core business into various other product markets (Aaker, 1980; Gluck 1985).

There is very significant research that shows corporate management of companies around the

world actively participating in diversification related activities. It is not doubted that there seems

to be a rise in diversified firms around the world (Datta et al 1991). Many corporate firms in

Europe who were surveyed claim that they do not only favor diversification but actively pursue it

(Kerin et al, 1990). It is common for firms to spend large amounts of money to acquire other

firms or to invest heavily in internal research and development merely to diversify their core

products and markets. Firms in Asia too are relentless in their pursuit of diversification. In the

Malaysia pewter industry, it is apparent that companies in the industry lack diversification and as

a result, many of the firms in the industry are unable to compete with Royal Selangor, the market

leader. It is quite obvious that a number of major benefits can be enjoyed by these firms if they

implement effective diversification strategies (Pandya and Rao, 1998).

Just like any kind of economic activity, there are significant costs and benefits which are linked

with diversification and ultimately, the performance of a company is dependent on the way that

managers are able to achieve a balance between costs and benefits. It is the opinion of a number

of management researchers that diversification is capable of prolonging the life span of a

company. Others claim that diversification is effective in improving debt capacity and also in

reducing the chances of bankruptcy by venturing into new products or markets (Higgins and

Schall 1975). This is especially important in the Malaysian pewter industry, where products lack

diversification. There are academics who have also claimed that diversification also improves the

asset deployment and profitability (Williamson, 1975). In addition, the skills which are

developed in one business and which is transferred to other businesses is helpful in increasing

the overall labor and capital productivity (Pandya and Rao, 1998).

A firm that is diversified is one that is capable of transferring funds from a cash surplus unit to a

cash deficit unit with not having to bear any taxation or transaction costs (Bhide, 1993). Also,

highly diversified companies are known to gather unsystematic risk and to reduce the overall

variability of operating cash flow and they also enjoy comparative advantages when it comes to

hiring and this is because the main employees of the company would have a higher sense of job

security (Bhide 1993).

The concepts of diversification, size of the firm and executive compensations are all very highly

correlated and this suggests that diversification is capable of providing benefits to company

managers which are not available to investors (Hoskisson and Hitt 1990) and this is observed to

creating an agency problem and managers are the ones who would lose when they become

unemployed and this is because of a lack of efficient firm performance or bankruptcy (Dutta et

al, 1991; Hoskisson and Hitt 1990). Diversification can also result in high expenses being

incurred by the company (Jones and Hill 1988) and it is likely to produce a high level of stress

on members of the upper management (McDougall and Round 1984).

The overall impact of diversification on the performance of the firm is mixed. Academicians like

Datta et al, 1991; Hoskisson and Hitt 1990, Kerin et al, 1990 have generally concluded that

the relationships between diversification and also performance are very complex and would be

affected by various intervening and contingent variables like related vs unrelated diversification,

the different type of relatedness, the industry structure, the overall capability of top managers as

well as the mode of diversification chosen by the company. There is research which states that

diversifying into related product-markets is helpful in producing higher returns in comparison to

diversifying into unrelated product-markets (Pandya and Rao, 1998). Research also suggests

that diversified firms are likely to perform much better in comparison to highly diversified firms

(Keats 1990; Rumelt, 1986). There are other academicians who have claimed that economies in

integrating operations and the core skills acquired in relation to diversification would outweigh

the costs of the internal capital markets as well as the smaller variances in relation to sales

revenues that are produced by unrelated diversification (Datta, et al, 1991).

There is a significant amount of agreement about the fact that related diversification is better

than unrelated diversification, it is clarified by Prahalad and Bettis, (1986) that it is the vision

and insight of the top managers in selecting the correct diversification strategy (how much and

what type of relatedness), as opposed to diversification per se, that is the key to a highly

profitable and successful diversification. What is apparent here, however, is that it is not the

product-market diversity but the strategic logic which are used by managers to connect firm

diversification to firm performance and this would imply that diversified firms which do not

have such logic might not perform very well (Pandya and Rao, 1998).

It was demonstrated by Markides and Williamson (1994) that strategic relatedness would

exhibit more superior over market relatedness when it comes to predicting when related

diversifiers would outperform the unrelated diversifiers. It is argued by others that it is not

management conduct but the industry structure that essentially governs the performance of the

firm (Montgomery 1985). Apart from the various types of diversification and industry

structures, there are a number of researchers who have examined how the firms diversify

(Pandya and Rao, 1998). For instance, Simmonds (1990) analyzed the combined effects of

breadth (related vs. unrelated) and mode (internal research and developed vs Mergers &

Acquisitions) and the finding that was made suggests that firms which practice related

diversification are more efficient performers than firms that practice related diversification and

that research and development based product development is more efficient than mergers and

acquisition- led diversification (Simmonds 1990, Lamont and Anderson 1985). Among studies

of acquisitions the results are mixed. There are commentators who have researched on the

performance of firms claim that diversified firms are likely to perform much better in

comparison to firms which are unrelatedly diversified (Rumelt, 1986).

Coming back to Malaysia’s pewter industry, there has yet to be significant research carried out

on the industry in terms of determining its level of diversification and the diversification related

strategies used by the companies in the industry. This is the main gap in literature which this

research aims to close.