Related Diversification

Related Diversification is the most popular distinction between the different types of diversification and is made with regard to how close the field of diversification is to the field of the existing business activities.

Related Diversification occurs when the company adds to or expands its existing line of production or markets. In these cases, the company starts manufacturing a new product or penetrates a new market related to its business activity. Under related diversification the company makes easier the consumption of its products by producing complementing goods or offering complementing services. For example, a shoe producer starts a line of purses and other leather accessories; an electronics repair shop adds to its portfolio of services the renting of appliances to the customers for temporary use until their own are repaired.

Experts have formulated two basic fields in relation to:

  • Opportunities for sharing resources: when all kinds of tangible and intangible resources can be shared or "copied" and the same trademark can be used.
  • Opportunities for strategic integration: when the integration of marketing strategies of two businesses brings benefits and the integrated efforts provide additional competitive advantages.

This type of diversification is used mostly by small businesses because it is less risky. In the majority of cases it does not require big investments and owners feel more secure because they know the opportunities and threats in the field of their main business activities. However, sometimes this diversification does not bring the expected results and profits. Most often the reason for this is the underestimation of accompanying problems and the need of knowledge and skills in the field of change management, cultural differences, human resource management (layoffs, quitting, promoting, hiring) and so on. However, the reason for not meeting the results and expectations of the diversification may be the overestimation of the expected benefits and profits from the synergy, during the preliminary analysis.