Firms practice-related and unrelated diversification strategies. Related businesses are those with similar or related core value chains, while unrelated businesses have dissimilar core value chains. Companies prefer related diversification so that they can transfer important company expertise or employee technical know-how and other organizational capabilities. They can merge several businesses into one operation, or make use of the popularity of one brand to influence customer’s perception of a related product. Related diversification can create “cross-business collaboration” to strengthen business capabilities (David, 2011, p. 143).
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Some businesses disregard diversification because they find it hard to manage different activities. An example of related diversification is Google’s strategy as a search engine and an advertising firm. J. M. Smuckers & Co., with its business of jam, peanut butter & oil, acquired Folger’s coffee business.
Unrelated diversification focuses on businesses’ capability and their “excellent financial performance” (David, 2011, p. 144), rather than on value chain strategies. Companies in this category look for portfolio firms with higher ROI. Portfolio diversification is a significant way of addressing risk and uncertainty in the investment environment. Companies invest in direct properties and look for firms with good portfolios using quantitative techniques (Olaleye, Aluko, & Oloyede, 2008). Analysts using this kind of technique require some statistics.
David, F. (2011). Strategic management: Concepts and cases (13th ed.). Upper Saddle River, New Jersey: Prentice Hall.
Olaleye, A., Aluko, B., & Oloyede, S. (2008). Evaluating diversification strategies for direct property investment portfolios. Journal of Real Estate Portfolio Management, 14(3), 223-231. Web.