Related and Non-Related Diversification

Related and Non-Related Diversification

        Diversification is a strategy used by a lot of global company. It becomes a survival strategy when single product or service strategy reaches the limits of revenue generation. To achieve genuine success from planned diversification firms must reinforce internal development; pursue value-chain acquisitions, form strategic alliances and joint ventures

Related diversification is when company expand their operations beyond current markets and products, but are still operating within existing capabilities or within the existing value network. It is when a business adds or expands its existing product lines or markets.  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. With a related diversification strategy, a company have the advantage of understanding the business and of knowing what the industry opportunities and threats are.

The example of company that using related diversification strategy is Proctor and Gamble. They provide branded consumer goods product worldwide. Their related business units are divided in three business unit. The first one is beauty business unit, where is divided into beauty and grooming segment. The second one is health and well-being business unit, where it is divided into health care, snacks coffee and pet care segment. While the third one is household care business unit, where it is divided into fabric care and home care, baby care and family care segment. So, all three business unit is related to Proctor and Gamble core business model. The second example is Johnson and Johnson. The engages in the research and development, manufacture, and sale of various products in the health care field worldwide. They separated their related product diversification into three segments. The first one is consumer segment, where they produce products for baby, skin care, oral care, wound care and many more. The second one is pharmaceutical segment where they produce products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology and many more.

The third one is medical devices and diagnostics segment. Products for circulatory diseases management, orthopedic joint reconstruction and spinal care, wound care and women’s health. So, these three segments are closely related to each other in the global market structure.

        Unrelated diversification is when a business adds new, or unrelated product lines or markets. For example, the same phone company might decide to go into the television business or into the radio business. This is unrelated diversification: there is no direct fit with the existing business. Company would like use this strategy because there may be cost efficiencies. Or the acquisition might provide an offsetting cash flow during a seasonal lull. The driver for this acquisition decision is profit; it needs to be a low risk investment, with high potential for return.