The measurement of corporate portfolio strategy: analysis of the content validity of related diversification indexes

James Arthur Robins · Margarethe F. Wiersema

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Business Strategies and Innovation Corporate Finance and Governance Innovation and Knowledge Management

Abstract

Abstract Measures developed for the analysis of corporate diversification have become fundamental to a broad range of strategy research. This paper examines the content validity of the two most widely used continuous measures of related diversification—the related component of the entropy index and the concentric index—and raises fundamental questions about their validity as indicators of portfolio relatedness. These questions are not driven by the use of SIC data for estimation of the indexes; they involve validity problems intrinsic to the construction of the measures. The related component of entropy and the concentric index are sensitive to features of corporate portfolio composition that may not be directly linked to portfolio relatedness. These sensitivities can create important ambiguities in strategy research. Copyright © 2002 John Wiley & Sons, Ltd.

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References

1996Toward a knowledge‐based theory of the firm 1995The Theory of the Growth of the Firm 1986Strategy and Structure:1992The resource‐based view within the conversation of strategic management 1996What Firms Do? Coordination, Identity, and Learning 1995Diversification's effect on firm value 1992TOP MANAGEMENT TEAM DEMOGRAPHY AND CORPORATE STRATEGIC CHANGE.1994Tobin's q, Corporate Diversification, and Firm Performance

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