Concentration on one type of business has organizational, managerial, and strategic advantages. As long as the company profits from growth in a mastered industry, there is no need to diversify, and diversification is not a strategic objective. However, diversification becomes the basis for achieving a certain level of internal and external flexibility in the dynamic external environment. This changes the four components of the market, the product, the industry, and the firm’s position in the sector. Thus, it is essential to consider related and unrelated diversification in order to distinguish the difference between them.
A diversification strategy is a marketing policy that allows a company to identify and develop additional lines of business that are distinct from its current products and services. In an increasingly competitive environment, a diversification strategy becomes an excellent tool for risk management (Thompson et al., 2020). Therefore, it avoids unnecessary focus on one direction of the company’s work. In addition, if properly implemented, a diversification strategy assists in maintaining the company’s performance and profits during an economic downturn, stagnation, or a dramatic change in the principles of the industry. The strategy can bring clear benefits to the firm and enhance business stability but requires a detailed assessment of the company’s internal resources, environmental factors, and in-depth knowledge of market trends (Thompson et al., 2020). It is significant to mention that unrelated diversification occurs when a company enters an industry that bears no substantive resemblance to the firm’s current industry or industries. Additionally, unrelated diversification can help firms balance their cash flows.
Thus, related diversification is when a company enters a new industry with significant similarities to its existing industry or lines of business. In other words, when a business supplement or expands its existing product lines or markets, it is referred to as an expansion. For instance, a telephone company that buys another wireless company to add or expand its wireless products and services is engaged in related diversification. Similarly, because Google is in the information industry, in 2014, it bought Titan Aerospace, a company that makes solar-powered drones (Alshamsi et al., 2018). This is an example of related diversification; in order to be more successful, some firms are doing appropriate diversification to develop and capitalize on core strengths.
Furthermore, unrelated diversification is when a company offers additional or unrelated product lines or markets. For example, a telephone company might decide to go into the television or radio industry. This is unrelated to diversification because it has nothing to do with the current business. Another example is Amazon’s purchase of Whole Foods, which allowed it to enter the grocery store market (Alshamsi et al., 2018). Hence, unrelated diversification is necessary to expand segments and industries that a particular business can control. In addition, tied diversification is essential to gain an advantage in one sector with the assistance of the dominant control.
Therefore, a diversification strategy is a corporate strategy that describes the process of an organization entering a new market by creating or acquiring a relevant business unit. Unrelated diversification involves entry into a new market by obtaining a business unit that has no correspondence in the value chain with the current directions of the corporation. However, related diversification implies entering a new market by forming a business unit in which the value chain elements will be similar to those already existing in the corporation’s portfolio.
References
Alshamsi, A., Pinheiro, F. L., & Hidalgo, C. A. (2018). Optimal diversification strategies in the networks of related products and of related research areas. Nature Communications, 9(1), 1-7. Web.
Thompson, A. A., Strickland III, A. J., Gamble, J. E., & Peteraf, M. A. (2020). Crafting & executing Strategy: Concepts and cases. McGraw Hill.