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Herfindahl Diversification Index/Evidence
Method evidence record

Herfindahl Diversification Index

The Herfindahl diversification index and its entropy cousin turn a firm's spread across businesses into a single continuous number, with the decisive advantage that the entropy form can be cleanly split into related and unrelated diversification. The Herfindahl-based measure is one minus the sum of squared segment revenue shares; the entropy measure, introduced for diversification by Jacquemin and Berry in 1979, is the share-weighted sum of the logged inverse shares. Jacquemin and Berry's key contribution was showing that total entropy decomposes additively into within-industry-group (related) and between-group (unrelated) components. Palepu's 1985 study applied this entropy decomposition to strategic management, finding that related diversification was associated with superior profit growth and giving the field an objective, replicable alternative to categorical schemes.

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Herfindahl and Entropy Measures of Corporate Diversification
Taxonomic method record · process-pipeline / strategic-management
  • Jacquemin, A. P., & Berry, C. H. (1979). Entropy measure of diversification and corporate growth. The Journal of Industrial Economics, 27(4), 359-369. · DOI 10.2307/2097958
  • Palepu, K. (1985). Diversification strategy, profit performance and the entropy measure. Strategic Management Journal, 6(3), 239-255. · DOI 10.1002/smj.4250060305
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Related methods

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Same method familyDiversification-Performance Analysis (Rumelt Categories)machine-suggested · Relational suggestion, not evidence.Same method familyMerger and Acquisition Performance Event Studymachine-suggested · Relational suggestion, not evidence.Used in the same domainTobin's Q Firm Value Analysismachine-suggested · Relational suggestion, not evidence.

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2 recorded citations, copied from the method source record.

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