Unrelated diversification occurs when a company enters an industry that bears no significant resemblance to the company’s current industry or industries. Unrelated diversification can help SBU businesses balance their cash flows. A company with a lot of SBUs that are worth investing in might buy or merge with a cash cow to get some cash. The cash cow acquisition may lessen the need to seek debt or equity over time, but resources must be expected if the cash cow is acquired. Let’s see the difference between Related vs Unrelated diversification strategies and examples.
Overview
Diversification strategies allow companies to enter completely new industries, related or unrelated. While vertical integration entails a company entering a new segment of an existing value chain, diversification necessitates entering an entirely new value chain. Many companies do this by merging with or acquiring another company, while others expand into new areas without the help of another company.
Why Use Unrelated Diversification?
If one of your businesses has a slow season, year, or several years, other businesses that are not related could still do well. Marketing consultant Preston Martelly says that this helps you avoid some of the worst things that can happen when business goes down.
Unrelated Diversification Example
Individual investors should follow the adage “don’t put all your eggs in one basket.” An investor can reduce the chances of experiencing a large loss by developing a stock portfolio. Some executives adopt a similar strategy. Rather than attempting to create synergy amongst businesses, they seek greater financial stability for their organizations by owning a variety of enterprises.
Why would a soft-drink manufacturer invest in a movie studio? It’s difficult to comprehend the rationale behind such a decision, yet Coca-Cola did just that when it paid $750 million for Columbia Pictures. This is an excellent example of unrelated diversification, which occurs when a company enters an industry that bears no significant resemblance to the company’s previous industry or industries. Coca-investment Cola’s paid off handsomely: Columbia was sold to Sony for $3.4 billion just seven years later.
The majority of unrelated diversification efforts, on the other hand, do not end happily. Harley-Davidson, for example, previously sought to sell bottled water with the Harley-Davidson logo on it. Starbucks attempted to diversify by selling furniture bearing the Starbucks logo. Both attempts failed miserably. Despite the fact that both Harley-Davidson and Starbucks have renowned brands, their strategic resources did not translate well to the bottled water and furniture industries.
What Is the Difference Between Related Constrained and Related Linked Diversification?
All the companies in a related-constrained firm have some kind of connection to each other, but in a related-linked firm, just a direct connection between two entities is necessary.
How Does Unrelated Diversification Create Value?
Diversified companies that are not related to each other can add value by buying other businesses at low prices, reorganizing them, and then selling them for a higher price.
Why Does Unrelated Diversification Fail?
Shipilov said firms fail to diversify because they lack the correct plan. They must consider what resources or competencies they can transfer between markets to gain a competitive edge.
Related vs Unrelated Diversification
Before you invest, be sure you understand the differences between related and unrelated diversification. Diversifying your firm, markets, or goods can be expensive; as a result, invest in a good diversification strategy.
Related Diversification
Related diversification is when a company enters a new industry that shares significant similarities with its existing industry or business lines.
When a company adds or expands its existing product lines or markets, this is known as expansion. For example, a phone company that purchases another wireless company to add or expand its wireless products and services is engaging in related diversification.
Because Google is in the information industry, it bought Titan Aerospace, a company that makes solar-powered drones, in 2014. This is an example of related diversification. To grow more successfully, some companies engage in relevant diversification with the goal of developing and exploiting a core strength. A core competency is a skill set that is difficult for competitors to duplicate, can be applied across industries, and contributes to the benefits obtained by customers.
Honda Motor Company is an excellent example of how a core strength may be used through related diversification. Although Honda is best known for its automobiles and trucks, the firm began as a motorcycle manufacturer. Honda has a unique capacity to create tiny, reliable engines as a result of competing in this industry. Honda was successful in part because it harnessed this expertise within its new business when leaders opted to diversify into the vehicle industry. Honda’s engine-building expertise was also put to use in the all-terrain vehicle, lawnmower, and boat motor industries. Honda has just built the HA-420 HondaJet, an energy-efficient six-passenger aircraft that is currently awaiting FAA approval.
Unrelated
This is when a company adds additional or unrelated product lines or markets. For example, a phone company might decide to venture into the television or radio industries. Its unrelated to diversification because it has nothing to do with the current business.
Why would a corporation seek to diversify into something unrelated? Because it may save cost. Alternatively, the transaction could provide a cash flow offset during a seasonal downturn. Profit is the driving force behind this purchase; it must be a low-risk investment with high return potential.
Why Do Businesses Diversify?
There are various reasons for a corporation to diversify, in addition to increasing profitability. Consider the following scenario:
- Diversification reduces risk in the case of a downturn in the sector.
- It offers businesses additional product and service variety and possibilities. Diversification, when done appropriately, can significantly improve a company’s brand image and profitability.
- A corporation can protect itself against competitors by diversifying its products or services.
- Diversification helps a corporation to employ spare cash flows in the case of a cash cow in a slow-growing area.
Conclusion
Diversification methods entail taking a strong step outside of the company’s current industries and into a new value chain. In general, relevant diversification (joining a new business with significant overlap with a company’s present industries) is preferable to unrelated diversification (entering a new industry that lacks such similarities).
Frequently Asked Questions
What is related diversification and unrelated diversification?
Diversification into related business lines in the same sector; an example is Volkswagen’s acquisition of Audi. Unrelated diversification into other areas, like Amazon’s purchase of Whole Foods, allowed it to join the grocery store market.
What is an example of related diversification?
When a company enters a new industry that shares significant similarities with its existing industry or industries, this is known as related diversification. Disney’s purchase of ABC is an example of linked diversification because films and television are both forms of entertainment.
What is an advantage of unrelated diversification?
Unrelated diversification has two advantages:
- Enhanced efficiency in cash management and investment capital allocation.
- The flexibility to rely on successful, low-growth firms to supply cash flow for high-growth businesses that require large inputs of cash.
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