A profitable organization does not consider diversification as a relevant strategy until and unless it sees a declining trend in business growth due to factors like unattractive competition in the market. Diversification becomes an urgency as a strategy for a company with a single- business if it continuously encounters diminishing marketing opportunities and stagnant sales in its core business.
In simpler words diversification strategy means introducing new products in an entirely new market.
Diversification Strategy
Types of Diversification Strategies
There are two types of diversification strategies: Related Diversification and Unrelated Diversification.
Related Diversification Strategy
A related diversification strategy is used by a company if it decides to diversify into a related business. Two businesses are said to be related if their value chains possess competitively valuable cross- business relationships. This strategy helps the organizations to perform better under the same corporate umbrella, as it wipes out the risk of being a stand- alone entity in the competitive market. In simpler words related diversification happens when a company diversifies into a new business that is quite similar to the company’s existing industry. Related diversification is used by the companies to take advantage of their core competency, which generally refers to a skill set that is difficult for the competitors to imitate and work on. The core competency of the company that uses related diversification is an excellent competency as it can be used across various industries to bring in customer satisfaction with its use.
M.A.C., (Make Up, Art, Cosmetics) a cosmetics company was established to cater to the professional make- up artists, but the company gradually used related diversification as a strategy to make its products available to the consumers worldwide. Estee lauder markets ‘Sensuous’ a very popular perfume brand under its name.
What Synergies do Companies Capitalize on While Diversifying into a Related Business?
Related diversification allows a company to manage complete transfer of valuable expertise, technological know- how, or other related capabilities from one business to the other.
Related Diversification strategy helps in bringing the related activities of the businesses into a single operation which leads to reduced costs.
Brand name of a company can be used to drive marketing efforts for the new business.
Competitively valuable resource strengths and capabilities can be created with the use of cross- business collaboration.
Google and Apple are perfect examples of related diversification. The companies have diversified into various related businesses over the years by capitalizing on their core strengths. Their brand names need no introduction and under one single umbrella of their brand name they have capitalized on the synergies of their core strengths like expertise and technology.
What Makes a Related Diversification Strategy Effective?
An organization should compete in a slow or no growth industry.
New but related products should be introduced to increase the sales of the existing products.
New but related products should be offered at highly competitive prices.
Presence of a strong management team.
Unrelated Diversification Strategy
Reliance Industries in India is a perfect example of unrelated diversification. The group has its footprints in almost all the major industrial sectors like Petroleum, Fashion and Retail, Telecom etc. Coco- Cola a successful soft drinks company purchased Columbia pictures for $750 million. These examples explain the concept behind unrelated diversification, which relates to making an entry into an industry that is not quite similar to the company’s existing industry. Another example of unrelated diversification is the acquisition of Holcim’s stake in Ambuja Cement and ACC for $6.4 billion in the year 2022 by the Adani Group in India. This was a big acquisition for Adani group as this deal made it the second largest cement player in the Indian market. The group has moved on from its core businesses of mining and edible foods into cement business, and this makes it a perfect example of unrelated diversification in the contemporary times.
Businesses are said to be unrelated when the activities comprising their respective value chains and resource requirements are so dissimilar that no competitively valuable cross- business relationships are present.
Why Companies opt for Unrelated Diversification?
Some companies do not want to focus on developing synergy across businesses, instead they look forward to greater financial stability for their firms by expanding into an array of companies. Organizations that favour unrelated diversification look for such companies across industries that can be acquired for a good deal and have the capability to provide high returns on investment in the future. Companies involved in an unrelated diversification are known as conglomerates, as their business interests vary broadly across diverse industries.
What kind of Companies are Acquired through Unrelated Diversification?
Unrelated diversification generally involves acquiring companies to enter a new business, as it helps in delivering increased shareholder value. The kind of acquisition companies that are of interests for the big corporations are:
Companies that are short on investment capital but have bright future prospects.
Companies that are undervalued and can be acquired at a bargain price.
Companies that are struggling to keep pace with the dynamic market changes and can be revived with the help of company’s financial resources and technical know- how.
Diversification strategies can involve Horizontal Integration (Mergers and Acquisitions) and Vertical Integration.
What makes Unrelated Diversification an Effective Strategy?
When a company adds new and unrelated products. It leads to an increase in the revenue share of the company.
Presence of strong distribution channels is important, as this strength can be capitalized to market new products to the existing customers.
Basic industry of the company should be experiencing a decrease in sales and profits.
Presence of a financial synergy between the acquiring and the acquired firm is important.
The market for company’s existing products and services should be saturated.
A company might go for either related or unrelated diversification or it can make use of both the strategies for expanding its current business share in the competitive market. Google has acquired various companies like Android and YouTube over the years in order to stay ahead of the competition in the tough market, but the choice for going for any kind of diversification is dependent on the strengths and capabilities of the existing business of a company. Diversification should focus on adding more to the shareholder value, and any industry that is chosen for diversification should attractive enough to yield high returns in the future.
