ISSN: 2222-6990
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Manufacturing small and medium-sized enterprises (SMEs) operate in an environment characterized by expanding growth opportunities, supply-chain disruptions, technological advances, intensifying competition, and limited managerial resources. Although diversification offers opportunities for growth, it does not necessarily create value. This conceptual paper examines the conditions under which related corporate diversification strategy (RCDS) enhances the performance of manufacturing SMEs in Malaysia. Drawing on prior literature, RCDS is reconceptualized as a higher-order formative construct comprising horizontal, vertical, and concentration strategies. The formative specification reflects the distinct strategic options represented by these dimensions, including expanding product offerings, extending involvement in upstream or downstream supply chains, and pursuing related technologies and markets. These strategies offer opportunities to generate technological and resource synergies, while potentially increasing coordination demands, information-processing requirements, and organizational complexity. The paper positions managerial ability as a boundary condition that determines whether potential diversification synergies translate into performance improvements. Recent scholarship identifies dynamic managerial capabilities, strategic flexibility, and organizational agility as important mechanisms through which SMEs convert resources into performance under uncertainty. Accordingly, two propositions are advanced: RCDS positively influences SME performance, and managerial ability strengthens this relationship. The paper contributes to strategic management literature by shifting attention from whether diversification benefits firms to how related diversification creates value and under which managerial conditions it becomes productive for manufacturing SMEs. By integrating distinct diversification strategies within a formative framework and specifying the moderating role of managerial ability, it provides a foundation for more precise theoretical development and empirical investigation. Implications are discussed for SME owners and managers, alongside directions for future research using partial least squares structural equation modelling (PLS-SEM).
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