Which of the following is not one of the appeals or benefits of related diversification?
A related diversification strategy is a corporate initiative to enter a new industry while also creating another product for that market. Unlike unrelated diversification, related diversification is more likely to increase shareholder value because of strategic fit.
It can spread risk by entering industries with different technologies, markets, and customers. It can also provide opportunities for growth and innovation by exposing the company to new technologies, customers, and competitors.
Moreover, it can allow the firm to gain access to new products and services without affecting profits in the existing business. A diversified company often uses its resources and capabilities to subsidize the operations of a new business.
However, this strategy can incur development, sales and marketing costs that may exceed the potential revenue and profit gains from the new business. It is therefore important to carefully consider the costs and potential benefits of a related diversification strategy before pursuing it.
The most common example of related diversification is when a company buys or enters a new business in the same industry as its existing business. For instance, Disney bought ABC because it recognized that films and television are both aspects of entertainment.
Companies with strong core strengths that are difficult to imitate can be especially effective at implementing related diversification. Honda Motor Company is an excellent example of a firm that used its engine-building expertise to diversify into the automobile industry.