Diversification strategy, profit performance and the entropy measure
Article first published online: 8 NOV 2006
Copyright © 1985 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 6, Issue 3, pages 239–255, July/September 1985
How to Cite
Palepu, K. (1985), Diversification strategy, profit performance and the entropy measure. Strat. Mgmt. J., 6: 239–255. doi: 10.1002/smj.4250060305
- Issue published online: 8 NOV 2006
- Article first published online: 8 NOV 2006
- Manuscript Revised: 10 APR 1984
- Manuscript Received: 22 APR 1983
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.