Related Diversification is when a firm expands into several distinct product lines or business lines, yet, these lines have similarities or commonalities. The similarities and commonalities are in their technologies, managerial and manpower skills, market and sales, distribution, customer base, suppliers and materials sources, operation processes, brand and reputation, and other opportunities in the business value chain. There are varied reasons for diversification but a common one would be – competitive advantage.
Advantages. (1) A firm can capitalize on its strengths and on areas where they are best at and transfer these competencies to another business. (2) In synergizing, businesses can increase their collective value which would be more than their individual or separate value. (3) Reduces risk when the organization is less dependent on just one business activity. (4) Reduces cost when firms share resources and activities common to the businesses. (5) There will be knowledge sharing and skills transfer which will be of common gain and benefit for businesses.
Disadvantages. (1) Shared risks, in some cases, where diversification is extensive. Different industries have different and unpredictable business cycles. (2) Shared losses when there are no strong commonalities to leverage competencies and during economic downturns when all industries will be hit altogether. (3) High bureaucratic costs of diversification.
A case of Relative Diversification would be Intel’s unsuccessful try in the semiconductor business. It lost considerably when the communications industry slumped. While its microprocessor business continues to enjoy stability, Intel was relatively new in the communications sector. Related Diversification must be taken if a firm’s distinct core competencies give it a competitive advantage in other businesses and the bureaucratic costs are less than the value generated from sharing of resources.