Unrelated Diversification

Unrelated Diversification is a form of diversification when the business adds new or unrelated product lines and penetrates new markets. For example, if the shoe producer enters the business of clothing manufacturing. In this case there is no direct connection with the company's existing business - this The unrelated diversification is based on the concept that any new business or company, which can be acquired under favorable financial conditions and has the potential for high revenues, is suitable for diversification.

This is essentially a financial approach

It is implemented when the research determines that this unrelated diversification in a completely new field would bring significantly higher revenues compared to the related diversification on the basis of similar products, services, markets or complementing strategies.

A good example of this kind of diversification, that brought high profits for a certain period of time, is that during recent years of growth many companies entered the construction market despite their significantly different field of main business activity.

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In this case, however, the lack of expertise and experience, and the insufficient knowledge of the market can lead to serious problems. Sometimes the unrelated diversification is based on the available expertise and experience of the human resources that can be utilized in completely unrelated fields. For example, if the owner of a trade company is competent in the field of computer design, they can open an internet store to sell goods and also expand activity by adding web page design services etc.

In this way the unrelated diversification can be accomplished using one of the following methods: Using the existing basic competences of the company and expanding from existing markets into new ones and starting new lines of production.

Usually such opportunity can be identified as a result of the main company business. For example a car dealer may start offering financial services by developing a car leasing scheme and selling cars through leasing.

Advantages

The unrelated diversification which is carefully developed and undertaken only after thorough analysis of the environment and the company's own resources usually brings very good financial results. However, in all cases it should be a low risk investment with a potential for high returns. In some cases of company acquisition, this diversification can secure funds on hand during a seasonal slowdown, adding to the cash flow for the main business activity. Read also about related and unrelated diversification

Spreading the risk through different sectors of the economy. It is very important to identify industries in which the business activity slowdown does not coincide with the slowdowns in the main business of the company.

Disadvantages

Achieving successful unrelated diversification requires good management skills, closely following each of the business activities and timely identifying and solving even the smallest problems.

The greater the number of business activities, the more difficult is the total management task. In many instances the overall performance of the unrelated business activities does not exceed the individual ones. Sometimes it is even worse, unless the managers are exceptionally talented and focused. As a rule, the implementation of unrelated diversification strategy requires allocation of significant financial and human resources and there is always the risk of harming the main company business.