Diversification-Performance Analysis (Rumelt Categories)

Diversification-performance analysis asks whether the kind of diversification a firm pursues — staying focused, expanding into related businesses, or building an unrelated conglomerate — is systematically associated with how well the firm performs. The categorical version originates with Rumelt's 1974 Strategy, Structure, and Economic Performance, which classified diversified firms by specialization and relatedness ratios into single-business, dominant-business, related, and unrelated types and found that related diversifiers tended to outperform unrelated ones. Palepu's 1985 study reframed diversification with the continuous Jacquemin-Berry entropy measure, again finding that related diversification was associated with superior profit growth, and showed how the index approach and Rumelt's categorical method can be combined to gain both objectivity and conceptual richness.