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Strategies of Related and Unrelated Diversification

1. Carefully explain the difference between a strategy of related diversification and a strategy of unrelated diversification.

2. What is meant by the term strategic fit? What are the advantages of pursuing strategic fit in choosing which industries to diversify into?

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Answer 1
Under related diversification, firms develop internally or go for acquisition of firms that have similar kind of business (Cant, Strydom, Jooste & du Plessis, 2009). It means, the products and markets are of similar kind, so the firms can gain advantage of synergy effects in terms of operational efficiency, research and development, brand name and marketing fields. In unrelated diversification, firms expand into unrelated business fields. In other words, the products and markets are totally unrelated form firms, so they may also fail. In related diversification, competencies are shared at high level. In contrast, in unrelated diversification, competencies are shared at low level.

Related diversification boosts profitability to high extent, while unrelated diversification does not boost profitability at high extent. In related diversification, firms can increase more values (Hill & ...

Solution Summary

The strategies of related and unrelated diversification are examined. The term strategic fit is defined.