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Diversification strategy, profit performance and the entropy measure
Author(s) -
Palepu Krishna
Publication year - 1985
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.4250060305
Subject(s) - diversification (marketing strategy) , generalized entropy index , industrial organization , entropy (arrow of time) , business , profit (economics) , econometrics , economics , microeconomics , marketing , panel data , physics , quantum mechanics
Several industrial organization studies, using diversification index measures, examined corporate diversification and economic performance and failed to find any significant relationship between them. Rumelt and other strategy researchers used a semisubjective classification scheme and uncovered a systematic relationship between diversification strategies and performance. This study combines the strengths of the index approach, namely, simplicity, objectivity and replicability, with the essential richness of Rumelt's methodology. Using the Jacquemin‐Berry entropy measure of diversification and the line‐of‐business data, this study finds that firms with predominantly related diversification show significantly better profit growth than firms with predominantly unrelated diversification.