Diversification is a marketing entry strategy that companies use to expand to new markets and products. This strategy allows companies to increase their profits by expanding their operations. However, it involves moving away from existing core activities. This way, companies can offer new products to a new customer base. With diversification, companies can expand their operations outside their core areas.
Most companies use diversification as a strategy to enter new markets. This way, they can expand their operations and increase their profits. On top of that, the potential access to a new customer base also helps companies increase their revenues. Diversification allows companies to deploy their existing resources into new products and markets. Therefore, it becomes involved in activities that differ from its core operations.
Through diversification, companies selectively change their product line and customer targets. On top of that, it may also involve altering production and distribution arrangements. However, these areas do not fall under the same strategy. Instead, companies use different diversification strategies that can help achieve varying results. Two of these strategies include unrelated and related diversification.
What is Unrelated Diversification?
Usually, when companies implement the diversification strategy, they prefer to move into similar areas. This strategy allows them to exploit opportunities existing for similar products, markets, and customers. Sometimes, however, companies may also expand their operations to unrelated areas. With this strategy, they can go beyond those areas to explore new markets, products, and customers. This strategy falls within unrelated diversification.
Unrelated diversification occurs when companies enter a market not similar to their own. In other words, that market does not have any commonalities with the company’s industry. With this strategy, companies develop strategic business units. These units represent the different areas or markets where the company is active. This way, companies can organize their business into several markets and manage them efficiently.
Unrelated diversification allows companies to expand operations. Instead of focusing on similar markets, it helps companies exceed their existing areas. Therefore, they do not focus on similar products, markets or customers. In contrast, unrelated diversification involves exploring new areas, which can be beneficial. On top of that, this strategy can also open up new revenue streams apart from the existing ones.
Another name used for unrelated diversification is conglomerate diversification. It allows companies to include unrelated businesses in their operations. Consequently, they can build a conglomerate of different types of activities. Companies use this strategy when the opportunities in the existing areas are not substantial. Therefore, unrelated diversification can help go beyond those areas to achieve better results.
Overall, unrelated diversification involves diversifying into new markets. However, those markets do not hold any similarities to a company’s existing operations. This strategy goes against related diversification, which includes exploiting commonalities. Unrelated diversification can have some risks due to the difference in operations. However, it can also be significantly beneficial in allowing companies to expand their businesses.
How Unrelated Diversification Work?
Unrelated diversification starts through a plan to expand operations. When companies identify the need to do so, they must decide on growth plans. Usually, companies have several options to achieve it. It may involve using organic growth or market development. These strategies include exploring the existing markets and products to achieve better results. Sometimes, however, companies may have limited opportunities in those areas.
The other option for companies is to expand beyond their current activities. This strategy involves going beyond the existing products and markets. Instead, it focuses on exploring new areas and attracting new customers. Within this strategy, companies also have further options. These options generally fall within the diversification strategy for market entry. This strategy can be beneficial when limited opportunities exist in the existing areas.
Within diversification, companies can expand their operations within their supply chain. This strategy involves taking over their suppliers or distributors. However, it includes exploring similar areas with communities. This strategy falls under related diversification and can be significantly beneficial. Nonetheless, companies may still face issues within this strategy. Furthermore, companies may also have limited opportunities in those areas.
With limited opportunities, companies must fall on to the unrelated diversification strategy. With this strategy, companies explore areas that differ from their core operations. Usually, it involves merging with or acquiring other companies that operate in other industries. This way, companies can expand their operations to those areas without entering as a new competitor. These areas usually do not hold any similarities to the company’s existing operations.
Overall, unrelated diversification works similarly to other expansion strategies. Instead of focusing on existing competencies, however, it goes beyond them. For most companies, it involves identifying valuable industries and opportunities for expansion. Unrelated diversification does not focus on whether those industries are similar to existing operations. Instead, it seeks profitable opportunities to expand and grow.
Advantages of Unrelated Diversification
Unrelated diversification can have significant advantages. These advantages relate to how companies exploit new markets and products. On top of that, unrelated diversification can help companies move out of their existing areas. This way, it helps diversify the business to reduce the risks associated with similar operations. Overall, the advantages of unrelated diversification include the following.
Reduced risks
One of the most significant advantages of unrelated diversification is the reduced risks. When companies diversify into an unrelated area, they reduce their risks. Usually, they include economic or cyclical downturns that can hinder progress and profits. In this regard, this strategy is similar to the diversification that investors use for their portfolios. This way, companies don’t require a single operation to be profitable.
Efficiency in capital allocation
Unrelated diversification can also result in the efficiencies in capital allocation. As mentioned, this strategy involves the creation of strategic business units. With these units, companies can allocate resources strategically to address the needs of each area. Similarly, employees can share responsibilities for similar roles. On top of that, companies can manage each area independently, adding to a decentralized approach.
Financial benefits
Unrelated diversification can also bring several financial benefits. It involves expanding to new areas, providing access to new revenues streams. On top of that, companies can use this strategy to restructure their operations. Some companies also use this strategy to enter business areas with significant return prospects. These benefits add to the financial advantages of unrelated diversification.
Disadvantages of Unrelated Diversification
Despite its advantages, unrelated diversification can have several disadvantages. Usually, the execution of this strategy plays a significant role in its success. Companies that cannot implement this strategy properly can lose more than they gain. Overall, some of the disadvantages of unrelated diversification include the following.
Loss of synergies
When companies go beyond their existing markets, they lose synergies. These synergies are common in related diversification. However, unrelated diversification can result in losing them. This disadvantage can also lead to increase opportunity costs. Due to the differences between the business areas, companies also lose economies of scale.
Slower decision making
A decentralized approach to unrelated diversification can have advantages. However, it may also lead to slower decision-making despite being decentralized. When companies structure their business around several areas, they add layers to corporate management. These layers can hinder progress during decision-making. In some cases, it can also lead to losing opportunities due to late decisions.
Conclusion
Unrelated diversification occurs when companies enter new markets and products. However, these areas do not hold similarities to their existing operations. Usually, it occurs when companies go beyond their current industry to expand operations. Unrelated diversification works similarly to other market entry strategies. However, they focus on unrelated areas instead. This strategy can have several advantages and disadvantages, as mentioned above.
