Diversification Strategy, Profit Performance and the Entropy Measure

Palepu (1985)

Introduction
The paper extends the research on the relation between Diverisification and firm performance (i.e. its profit impact)

Industrial organization paradigm researchers find no significant relation Strategic management paradigm researchers (headed by Rumelt) find a systematic relationship

The fundamental difference between the two stream being the methodology used to measure corporate diversification. (Rumelts classification scheme differentiate between related and unrelated diversification)

Literature review main contributions

Author Gort (1962)

Paradigm Measures used I/O 1. Count of industries in which firm operated 2. Complement of specialisation ratio 3. Product of (1) and (2) 1. Complement of specialisation ratio 2. (1) * number of industries in which firm operates 3. Summation of share of firm O/P in each * concentration ratio 4. Summation of share of firm O/P in each * total o/p of that industry accounted by the firm

Results No significant relation

Arnould (1969)

I/O

No significant relation

Markham (1973) Rumelt (1974)

I/O SM Categorical dimension of diversification extended on wrigly(1970)

Negative relationship Firm with related div performed better

Hypothesis

Entropy measure of Diversification

Results
Hypothesis H1

Hypothesis H2

Results
Hypothesis H3

Hypothesis H3

Implications
Results indicate that the earlier studies failed because they failed to account for related and unrelated diversification.

Another flaw is that they focused on only cross sectional relationship and not over time.

Thank You