Related and Unrelated Diversification Strategies

Strategy Selection Paper
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Strategy Selection Paper
Introduction
It is increasingly crucial to predict and provide future business development directions in the current business environment characterized by global economic integration and constant changes. The diversification strategy emerges as a highly significant and necessary resource in orienting and shifting business activities as per the objectives coinciding with the business environment demands. Companies need to develop and implement diversification strategies to augment market share, increase competitiveness, and ensure sustainable growth in their business sector while scaling up their operations into new areas of the economy. In this way, a firm’s strategy influences its capacity to realize its long-term objectives. This paper evaluates the differences between and the reasons for selecting related and/or unrelated diversification strategies.
Differences between Related and Unrelated Diversification
Diversification strategies can be categorized into related and unrelated. Related diversification (also referred to as concentric diversification) is a strategy where innovative development activities are similar or relate to the company’s basic production activities, including technology, management, brand, customers, and distribution (Tien & Ngoc, 2019). A firm uses a strategy to scale its operations into new markets or product offerings though limited to the current investment dimensions (Ahmed & Simba, 2019). The primary rationale for executing a related diversification strategy is to exploit the business’ critical internal advantages. The organizational leaders depend on brand relationships between the enterprise and new operation areas and the partnership to two echoing impacts on the resource’s utilization (Tien & Ngoc, 2019). Unrelated diversification (also called non-linked diversification) is the strategy firms use to scale up their operation areas beyond the current strategic capacities to ensure the new enterprise created has little to no similarities with the current business activities (Ahmed & Simba, 2019). In this diversification approach, new activities are solely expressed outside the preceding activity (Tien & Ngoc, 2019). Unrelated diversification is not related to the existing business sector of the enterprise.
In concept, related diversification entails shifting into new business activities linked to the existing business operations by the similarity of one or more components within each activity’s value chain. Unrelated diversification entails expanding into a new sector that is not explicitly related to current business areas. While related diversification creates values through economies of the scope, restructuring processes, and capabilities transfer between enterprise units, unrelated diversification creates values solely by pursuing an approach of acquisition and restructuring due to the absence of similarity between unrelated activities’ values chain (Tien & Ngoc, 2019). Related diversification derives its costs from the number of enterprise units involved as well as the scope economies. On the other hand, unrelated diversification costs emanate from the number of company units (Tien & Ngoc, 2019). For instance, it is increasingly challenging for the manager to comprehend the complexities of the respective business units when a company has many units. In related diversification, execution conditions include the number of company units. The implementation conditions for unrelated diversification include that (a) the core competencies of the firm are increasingly specialized and have few applications outside the primary functions of the enterprise, (b) the management cost of implementation does not surpass the value generated, and (c) the top leadership of the firm has experience in moving and buying weak enterprise units (Tien & Ngoc, 2019).
Rationales for Selecting Related and/or Unrelated Diversification Strategies
The economies-of-scope theory best explains why an enterprise would prioritize related diversification over unrelated diversification. In implementing a related approach, synergetic roles come into play in new enterprise...