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Analysis Of The Benefits Of Related And Unrelated Diversification For Companies

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Introduction

From time to time the firms diversify the business activities to add new product or expanding into new market. The diversified firms are categorized as related diversification or unrelated diversification based on the firm’s preexisting products, activities and also according to their targets. The companies either they should select related diversification or unrelated diversification, the different cost associated to related diversification and unrelated diversification can limit or influence a positive effect. There are various potential benefits associated with a particular diversification strategy. This study has worked on the investigation on how can the companies benefit from related and unrelated diversification by being based on the advantages of each diversification strategy and how it should be achieved. I tried to manage to identify some practices that can be applied and give an effective output.

How Can Companies Benefit From Related Diversification

As we have seen above, the related diversification it is a popular diversification which takes place when the firm adds to or expanding a firm’s existing line of marking or production. When related diversification is used in effective way, the companies may well get benefits from it. Here are the following ways the companies can benefit from related diversification:

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  • The firm should benefit from related diversification if an accurate market research is well conducted before adding products or market expansion of the firm in order to analyze and study well if the product addition or expansion is really needed at the right place and right time. This market research can help the firm to benefit by identifying how, where and when the product addition or expansion is needed.
  • Related diversification is less risky for small companies and it doesn’t have need of a lot of investments but the manager or owner has to evaluate well the expansion possibilities not only to be based on those current opportunities and threats of the current business. The management team need to conduct a deep analysis and investigation in order to feel secure about the expansion or related products addition, this helps to obtain estimated benefit for the companies when applying related diversification.
  • The companies can benefit from related diversification by applying vertical integration, the vertical integration improves the control over the quality of supplies, which can help the firm to secure more access to input and as result it can bring more benefits to companies.
  • The companies can benefit from related diversification by concentrating investments where benefit or profit is high while risks are low.
  • Companies can benefit from related diversification through market power as market power leads to high profit. The market power is the capability of a company to influence profitably the market price by controlling the level of demand and supply over the competitors. Actually when the companies are merging to work together it is one of good contributions towards market power.
  • Economies of scope should be applied in order to increase benefit as it involves average cost reduction and cost per unit through resource sharing, flexible mix of products and product design, low wastage, less training and risk reduction.
  • Companies can benefits from the related satisfaction through Customer satisfaction, this can be achieved by providing good services or products which satisfy customers.
  • When related products are added, the companies can benefit trough shared manufacturing facilities like machineries, land, sales management, raw materials, related technologies, marketing and distribution networks, employees, expenses like electricity and rent, etc. This can play a very big and important in cost reduction, cost saving and also in improvement of benefit.
  • Related diversification with Innovation and creativity can help the companies to benefit more over the competitors, because innovation and creativity bring services or products with uniqueness.

How Can Companies Benefit From Unrelated Diversification

Unrelated diversification is one type of diversification where a firm augments unrelated product line or new product, there is no relationship between the new line and existed line of business. When this type of diversification is used in effective way, the firms can benefits more from it. Here are the following factors to show how the companies can benefit from the unrelated diversification:

  • The company can benefit from unrelated diversification by enhancing target business through parenting, the parenting will help the firm to monitor and evaluate the financial performance of investments.
  • The management team can invest before deeply about the attractive and smart segments, this makes more benefits to companies.
  • Before the companies joined for unrelated diversification, they should take care and consider the required skills and expertise of the top managers. The skills and expertise of top management team is one the factors the firm’s benefit depends on.
  • The size of companies before joint or venture must be revised and analyzed because sometimes the resources allocation among the firms should be a big challenges for the big companies.
  • From unrelated diversification in order to get profit the management team should concentrate investments where profit is high and risks are low.
  • The management team should analyze and seek for ways to enlarge devoid of high risk or else slow down the investments and streamlined operations.
  • To get benefit from unrelated diversification the strong management team must be created, the management team have to have experience and skills in the new line of business.
  • The business units must build an effective communication and corporation so that synergies can created.
  • The firms can benefit from unrelated diversification through customer satisfaction, this may be achieved by providing good services or products with a quality which satisfy the customers.
  • Unrelated diversification with innovation and creativity can make the companies to benefit more over the competitors.

Conclusion

How the companies can benefit from diversifications like related diversification or unrelated diversification depends on the way those diversification’s types have been planned, implemented, monitored and evaluated. Business holders have to analyze and measure the advantages and disadvantages of related and unrelated diversification so that they can identify the greatest effective diversification strategies for their firms.

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