Expansion through Diversification : Related diversification and Unrelated diversification

Definition

Diversification is a business development strategy allowing a company to enter additional lines of business that are different from the current products, services and markets.

 Diversification strategies involve widening an organisation’s scope across different products and market sectors.  Diversification is a corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market.

Diversification is a corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market.

Diversification is a strategy that takes a company into new markets with new products or
services.

Reasons to choose a diversification strategy  

Companies may choose a diversification strategy for different reasons.

 Firstly, companies might wish to create and exploit economies of scope, in which the company tries to utilize its exciting resources and capabilities in other markets. This can often times be the case if companies have under-utilized resources or capabilities that cannot be easily disposed or closed. Using a diversification strategy, companies may therefore be able to utilize all its capabilities or resources, and able to attract new business from market segments not catered to earlier.

 Secondly, managerial skills found within the company may be successfully used in other markets, where the dominant logic and managerial procedures of management can be successfully transferred to other markets.

 Thirdly, companies pursuing a diversification strategy may be able to cross-subsidize one
product with the surplus of another. This way, companies with a very diverse portfolio of
products catering to different markets may potentially grow in power, and be able to
withstand a prolonged period of price competition etc. When having subsidized one product
for a substantial period of time, the company might possibly be able to v/in a monopoly,
making it the only supplier in the respective market.

Fourthly, companies may also v/ant to use a diversification strategy to spread financial risk over different markets and products, so that the entire success of the company is not reliant on one market or product only.

There may however be other reasons for companies to use a diversification strategy than
the four listed above, and companies may very well benefit from a diversification strategy
for other reasons.

However, it is important for companies to realize the possible danger of diversifying its scope of operations to much. Companies might risk neglecting its core capabilities and become too diversified, where too many different products supplied to different markets might have negative effects on products and services, where e.g. product quality or uniqueness might suffer due to the shift in focus on different products and markets.

Types of  diversification strategy

The diversification strategy can be split into two different types:

1. Related diversification
2. Unrelated diversification

Related diversification

it is one of the two variants of diversification strategy. When making
related diversification, companies expand their operations beyond current markets and
products, but are still operating within existing capabilities or within the existing value
network.

When expanding into different products or markets using existing capabilities, companies
can create related diversification by using its capabilities and resources in other settings. A
car manufacturer might for instance expand its operations into manufacturing of
motorcycles or trucks, and use its capabilities and resources to become successful in these
markets.

Likewise, a company might create related diversification by integrating into the existing
value network. For instance, companies producing steel might go into the mining business,
where it might control the supplies etc. for its main operations. Likewise, clothes
manufacturers might create their own brand shops, in which they sell their clothes.

Above we see some examples of related diversification, which might give the companies
the advantages of a diversification strategy.

Unrelated differentiation

Unrelated differentiation is a diversification strategy where companies expand their operation into markets or products beyond current resources and capabilities. This strategy is also sometimes referred to as the conglomerate strategy.

The unrelated diversification seems to be applicable and meaningful in at least two cases:

Firstly, if the parent company is able to provide different businesses with managerial
knowledge and expertise that strengthens the individual business, it will be very feasible to diverse into different markets that will potentially increase parent company profits.

Secondly, unrelated diversification might give a company the oppurtunity of increasing the strength of the economy of different markets, and to develop competencies that can be shared between different markets and products.