Unrelated diversification or conglomerate strategy of the firm

Unrelated diversification is a growth strategy, in which firm develops products and markets beyond its capabilities and its value systems. Habitually called the conglomerate strategy, this strategy does not involve neither economics of scale nor economics of scope. However, many costs can occur (e.g., executive management, office administration, relations and decision-making between headquarters and the member units, and scattered resources) when firm implements an unrelated diversification. These are in fact the main disadvantage of conglomerate business model, called the “conglomerate discount” effect, when the conglomerate value as a whole is lower than the total value of its stand-alone firms or business (Johnson et al., 2005). The main and also the most important advantage of unrelated diversification strategy consist in risk dispersion, when firm has many different and independent business; and does not depend on any particular one.

Firm can adopt unrelated diversification strategy when their existing resources or special capabilities cannot be applied in industries other than their core business. For example, American Can is a multidisciplinary company in record, fashion, reclaiming land, plastic and canning. Kierhoff Group involved in many business areas such as branded automobile engines, lawn mowers, dryers, plumbing components … Others diversify their products in accordance with market changes, for example: Microsoft invests in developing XBox games by realizing the potential of the smart game market in the future.

Leave a Reply

Your email address will not be published. Required fields are marked *