Starting from the theory of growth of the firm, attempts were made by several researchers to understand the relationship between strategy and structure of an organization. Most studies took the sample of Fortune 500 companies and linked the diversification strategy of the sample companies with the economic performance of the organization. This paper attempts to debate the reasons and motivations behind corporate diversification and the resulting economic consequences. Such analysis is expected to provide useful insights for taking appropriate investment decisions. An attempt is made to analyze issues on the nature of the firm and the Penrose-Effect. Market failure conditions and the four classes of scope economies are discussed to provide insights into the concepts underlying corporate diversification, an area of importance for the entrepreneurs and senior management of any organization.

This paper attempts to assess the performance differences among firms, following various strategies of diversification. Such analysis is expected to provide useful insights for taking appropriate investment decisions. Starting from the nature of the firm, dynamic considerations, the paper explains concepts underlying learning, teaching and Penrose-Effect. Further the paper discusses demand conditions, market failure conditions and the four classes of scope economies viz., Class-I: Indivisible but nonspecialized physical capital as a common input into two or more products, Class-II: Indivisible specialized physical capital as a common input to two or more products, Class-III: Human capital as a common input to two or more products and Class-IV: External economies.

The objectives of the study are: To understand the characteristics of multi product firms, to understand whether the inputs employed are necessarily specialized to the particular products or services, to understand the learning, teaching and Penrose effect and finally to analyze the four classes of scope economies underlying economics of corporate diversification.The methodology followed is to analyze the published empirical studies conducted on the theme of strategy, structure and economic performance of multi product companies. The literature thus surveyed, mainly represents the studies related to economics, behavior and motivation of the firms and managers of American corporates diversifying into related or unrelated products. In particular various debates on specialization vs. diversification are analyzed to benefit the contemporary corporate executives to arrive at pragmatic decisions with reference to the product portfolio.