The Impact of Entropy Index as a Measure of Diversification Strategy on Firm Performance during Covid-19 Pandemic: Evidence from DIMO PLC

Abstract

Businesses in Sri Lanka experienced decreased performance as a direct result of the COVID-19 pandemic. This study is conducted to determine the effect that diversification strategies have on the overall performance of DIMO PLC, the largest automotive company in Sri Lanka pre and during the pandemic. It was found that the entropy index of related and unrelated diversification strategies had a perfect relationship with the company's accounting-based performance (ROA and ROE) and market-based performance (Tobin's Q) during the period 2012 to 2021, inclusive of the COVID-19 period starting in 2019. This was discovered after DIMO PLC had been expanding its operations into other alternative business sectors for several years. The unrelated diversification strategies implemented by DIMO PLC have positively exaggerated the company's performance while simultaneously maintaining the unexpected results that the COVID-19 pandemic has produced. According to DIMO PLC findings, there is a positive association between unrelated diversification and financial performance. Possible explanations include the ability to back up and justify the capital expenditure required for diversity, political connections in an emerging economy, and investor expectations, who view corporate diversification as a productive management activity. Furthermore, a negative link between firm size and performance was discovered. According to the findings of the VECM analysis, DIMO PLC results revealed that unrelated diversity is positively related to company long-run performance, whereas related diversification is negatively related to firm long-run performance. DIMO PLC is generally acknowledged as an automobile industry specialist and implements relevant diversification techniques. Despite the effects of the Covid-19 pandemic and import limitations, the company has been able to sustain stable overall performance. According to the study's findings, DIMO PLC may be able to achieve its objectives by overcoming unexpected challenges with efficient strategies such as testing their operations into seemingly unrelated diversification strategies such as the agricultural, biomedical, construction, and material handling industries. Finally, it is suggested that diversification would have both positive and negative effects on firm performance and that businesses should prioritize developing appropriate approaches in order to effectively face challenges.