Related and Unrelated Diversification Strategy

Related Diversification Strategy

Related diversification is a strategic approach in which a business expands its operations into areas similar to its existing operations. This strategy leverages the company’s core competencies, knowledge, and capabilities in adjacent or related markets or products. The aim is to achieve synergies where the whole becomes more significant than the sum of its parts, leading to increased competitive advantage and value creation. Here are some key aspects of related diversification:

Leveraging Core Competencies: The company uses its strengths, such as specific knowledge, expertise, or technology, to enter into new but related markets. For example, a company specializing in optical lenses might diversify into manufacturing camera lenses, leveraging its expertise in precision optics.
Market or Product Expansion: Related diversification can involve expanding into new geographic markets with existing products or introducing new products or services related to the company’s existing offerings to current markets.
Synergy Creation: The goal is to create synergies by integrating the new business with the existing operations. This could mean shared manufacturing facilities, combined marketing efforts, or leveraging existing sales channels to reduce costs and increase revenue.
Risk Reduction: Companies can spread their risks by diversifying into related areas. If one market faces a downturn, the company is not wholly dependent on it and can rely on revenues from its other related markets.
Competitive Advantage: Related diversification can provide a competitive edge by allowing companies to offer a broader range of products or services, thus increasing their appeal to customers and creating barriers to entry for competitors.
Innovation and Growth: It encourages innovation by allowing a company to apply its competencies in new ways or to new markets, leading to growth opportunities beyond the saturation levels of its current markets.

Examples of a related diversification strategy

Examples of related diversification strategies involve companies extending their existing operations into areas that have a logical connection to their current lines of business, thereby leveraging their core competencies, market knowledge, and operational capabilities. Here are a few illustrative examples:

Google (Alphabet Inc.): Originally focused on internet search and advertising, Google has diversified into related areas such as cloud computing (Google Cloud), mobile operating systems (Android), hardware products (Google Pixel smartphones and Nest smart home devices), and autonomous vehicles (Waymo). Each venture leverages Google’s core competencies in software, data analysis, and user experience design.
Amazon: As an online bookstore, Amazon expanded into selling various consumer goods and electronics. Further diversification into related areas includes Amazon Web Services (AWS), a leading cloud service provider that leverages Amazon’s vast experience in large-scale computing and data center management. Amazon has also ventured into the smart home market by acquiring Ring and developing its Echo devices, utilizing its expertise in e-commerce, logistics, and artificial intelligence.
Disney: Disney’s core business has traditionally been animation and film production. The company has successfully diversified into related areas such as theme parks (Disneyland and Disney World), cruise lines (Disney Cruise Line), and media networks (ESPN, ABC). More recently, Disney has expanded into digital streaming with Disney+, leveraging its substantial content library and brand recognition in entertainment.
Apple: Known for its computers and software, Apple successfully diversified into portable music devices with the iPod, followed by a significant entry into the smartphone market with the iPhone. Later, Apple introduced the iPad, smartwatches (Apple Watch), and subscription services (Apple Music, Apple TV+), all related to its core competencies in hardware design, software development, and user interface design.
Nike: Initially focusing on athletic footwear, Nike expanded into athletic apparel, sports equipment, and accessories, leveraging its brand reputation for quality and performance. Nike has also ventured into technology with products like the Nike+ running sensor and apps, combining its expertise in sports with digital technology to enhance customer experiences.
Coca-Cola: Starting with its flagship carbonated drink, Coca-Cola diversified into various other beverage categories, including water (Dasani), juices (Minute Maid), tea (Fuze Tea), and sports drinks (Powerade), leveraging its distribution channels, brand marketing, and product development capabilities.

These examples illustrate how companies can grow by venturing into new but related areas where they can apply their existing strengths and assets to gain a competitive edge and access new revenue streams.

Unrelated Diversification Strategy

Unrelated diversification is a corporate strategy in which a company expands its operations into areas that are not linked to its current businesses or industries. This approach is also known as conglomerate diversification. The primary motivation behind unrelated diversification is often to maximize returns by spreading risks across different industries rather than seeking synergies through related business activities. Here are some key aspects and implications of pursuing an unrelated diversification strategy:

Key Characteristics

Lack of Synergy: The new business activities do not necessarily share a common technological, customer, or industry background with the company’s existing operations.
Risk Reduction: By diversifying into unrelated businesses, a company can reduce its exposure to industry-specific risks or downturns.
Capital Allocation: Companies with strong cash flows from mature industries might invest in unrelated businesses to seek higher growth opportunities.
Management Challenges: Managing businesses across diverse industries can be challenging due to the lack of common expertise or knowledge, potentially leading to inefficiencies or strategic misalignment.

Advantages

Risk Diversification: Spreading investments across different industries can protect the company from downturns in any single market.
Financial Synergies: The cash flows from one part of the business can support others that might require significant investment or are experiencing temporary downturns.
Leveraging Core Competencies in Management and Operations: Even if the industries are unrelated, a company might leverage its managerial, operational, or financial capabilities across its portfolio.

Disadvantages

Lack of Focus: Diversifying into many unrelated businesses can dilute the company’s focus and lead to a lack of depth in any one industry.
Complexity in Management: Managing businesses in different industries requires broad expertise and can complicate strategic decision-making and operational efficiency.
Potential for Poor Performance: Companies may make ill-informed decisions without industry-specific knowledge, leading to underperformance in some of the diversified units.

Examples of Unrelated Diversification Strategy

Unrelated diversification strategies involve companies expanding into industries or markets with no significant connection to their existing lines of business. This approach is often pursued to spread risk across diverse industries or optimize excess cash use. Here are some notable examples of companies that have implemented unrelated diversification strategies:

Berkshire Hathaway: Perhaps the most famous example, Berkshire Hathaway, led by Warren Buffett, is a conglomerate holding company that owns a diverse range of businesses, including insurance (GEICO, General Re), rail transportation (BNSF), energy (Berkshire Hathaway Energy), manufacturing (Precision Castparts, Lubrizol), retail (Nebraska Furniture Mart, See’s Candies), and food (Dairy Queen). These businesses operate in vastly different industries, and the conglomerate model allows Berkshire Hathaway to allocate capital efficiently across its portfolio.
Virgin Group: Richard Branson’s Virgin Group has expanded into a wide array of sectors, many unrelated to its original business in the music industry. Virgin’s portfolio includes airlines (Virgin Atlantic), telecommunications (Virgin Mobile), space tourism (Virgin Galactic), health and wellness (Virgin Active), and even banking (Virgin Money). This diversification is brand-driven mainly, with the Virgin name signifying a particular lifestyle or quality rather than industry-specific expertise.
Tata Group: An Indian multinational conglomerate, the Tata Group, operates in more than 100 countries across six continents, with businesses ranging from steel (Tata Steel), automobiles (Tata Motors, Jaguar Land Rover), information technology (Tata Consultancy Services), hospitality (Taj Hotels), and consumer goods (Tata Consumer Products) to aerospace and defense (Tata Advanced Systems). The diversity of its portfolio showcases a broad, unrelated diversification strategy, with each business operating independently under the overarching Tata brand.
Mitsubishi Corporation: A Japanese conglomerate, Mitsubishi Corporation, is involved in a wide range of businesses through its multiple business groups, including natural gas, industrial materials, petroleum and chemicals, mineral resources, industrial infrastructure, automotive and mobility, food industry, consumer industry, and power solution. This diversification strategy spreads risk and leverages the corporation’s extensive resources and capabilities across unrelated industries.
General Electric (GE): Although GE has refocused its business in recent years, historically, it was one of the most diversified conglomerates, with operations spanning from aviation, healthcare, and energy to financial services through GE Capital. This diversification allowed GE to leverage its industrial and technological expertise across various industries.

These examples demonstrate how unrelated diversification can be a strategic choice to reduce dependence on a single industry, spread risks, and potentially capitalize on new opportunities. However, managing such diverse portfolios requires strong central management capabilities and an ability to invest in areas with promising growth prospects without the synergies from operating in related businesses.

What is a diversification strategy | Explained with Types