In: Operations Management
Explain the difference in related and unrelated diversification. Identify two companies that have achieved earning's growth through related diversification and two that have achieved such growth in unrelated diversification. Explain the basis for your examples.
Answer:
Diversification is the art of entering product markets different from those in which the firm is currently engaged. Related diversification is one in which the two involved businesses have meaningful commonalties, which provide the potential to generate economies of scale or synergies based upon the exchange of skills or resources.
This will achieve improved ROI because of increased revenues, decreased costs, or reduced investment. For example, a manufacturer of computers might begin making calculators as a form of related diversification of its existing business. For example, Puma extended its presence to the sunglass market. ,
Unrelated diversification lacks commonality in markets, distribution channels, production technology, and R&D thrust to provide the opportunity for synergy through the exchange or sharing of assets or skills. The reduction of risk can be another motivation for unrelated diversification.
The reliance is one of the example of unrelated diversification. This risk reduces the cyclic nature of business. For example General Electric Operates as an infrastructure and financial services company worldwide.