Question

How can companies benefit from relates diversification? Unrelated diversification? What are some of the key concepts that can explain such success?

Answer 1

Related Diversification:-

Related Diversification occurs when the company adds to or expands its existing line of production or markets. In these cases, the company starts manufacturing a new product or penetrates a new market related to its business activity. Under related diversification the company makes easier the consumption of its products by producing complementing goods or offering complementing services. For example, a shoe producer starts a line of purses and other leather accessories; an electronics repair shop adds to its portfolio of services the renting of appliances to the customers for temporary use until their own are repaired.

The potential benefits of related diversification stem from augmenting the effective use of the surviving company’s core skills and resources. Usually such improvement requires an exchange of core skills and resources among the partners.

Benefits from relates diversificaiton:-

• Adding new products and service lines or starting new companies within a group can significantly enhance your ability to grow rapidly.
• As the economy changes, the spending patterns of the people change. Diversification into a number of industries or product line can help create a balance for the entity during these ups and downs.
• There will always be unpleasant surprises within a single investment. Being diversified can help in balancing such surprises.
• Diversification helps to maximize the use of potentially underutilized resources.
• Certain industries may fall down for a specific time frame owing to economic factors. Diversification provides movement away from activities which may be declining.

There are many ways in which to diversify. The most straightforward of these is to provide a natural extension of the goods or services that you already offer to customers.  For instance,-On a bigger stage, the Coca-Cola company is best known for Coke, but popular as that drink is, it certainly isn’t to everyone’s taste. To maximise market share the company offers a broad range of soft drinks, from orange through to diet versions of Coke itself.

Diversification can also take the form of brand extension across an apparently unconnected range of products or companies. For instance, the Virgin brand has been stretched across transport (trains, planes, holidays), music (record retail and recording), telecommunications (TV and mobile phones) and financial services.

Unrelated diversification:-

The unrelated diversification is based on the concept that any new business or company, which can be acquired under favorable financial conditions and has the potential for high revenues, is suitable for diversification. This is essentially a financial approach; it is implemented when the research determines that this unrelated diversification in a completely new field would bring significantly higher revenues compared to the related diversification on the basis of similar products, services, markets or complementing strategies.

Sometimes the unrelated diversification is based on the available expertise and experience of the human resources that can be utilized in completely unrelated fields. For example, if the owner of a trade company is competent in the field of computer design, they can open an internet store to sell goods and also expand activity by adding web page design services etc.

Benefits of unreated diversificaiton:-

(1) increased efficiency in cash management and in allocation of investment capital.

(2)The capability to call on profitable, low-growth businesses to provide the cash flow for high-growth businesses that require significant infusions of cash.

Whether pursuing related or unrelated diversification, it is often the acquiring company’s management skills and resources.

some of the key concepts that can explain such success:-

Diversification is used by businesses to help them expand into markets and industries that they haven’t currently explored. This is achieved by adding new products, services, or features that will appeal to the customers in these new markets.

By expanding their reach and appeal, businesses are able to explore new avenues for sales, and in turn, have the potential to vastly increase their profits.

Diversification is part of the four main growth strategies defined by the Product/Market matrix.

Diversification is a growth strategy that involves entering into a new market or industry that your business does not currently operate in or creating new products or services, which your business does not currently offer.