Related diversification is when a company enters a new business that is related to its existing business and can benefit from leveraging its core competencies, sharing activities, or building market power. This type of diversification can result in economies of scope, where a company can leverage its core competencies or share related activities among its businesses, resulting in cost savings and efficiencies. Companies can also build market power by exercising pooled negotiating power or vertical integration into the buyer or supplier industry. Vertical integration enables a company to have secure access to strategic inputs and to gain efficiencies through coordinating the delivery of inputs and outputs.
Unrelated diversification, on the other hand, is when a company enters a business that uses different core competencies and operates in different markets. Companies can benefit from unrelated diversification by improving the target businesses through parenting or restructuring. Parenting involves providing expertise and support to improve planning, budgeting, management performance evaluation, and procurement practices. Restructuring, on the other hand, involves substantially changing the assets, capital structure, and/or management of the target business to improve its performance.
Portfolio management is a method of assessing a corporation's entire portfolio of businesses to determine the strategic options and contribution of each business to the corporate overall performance. For corporations with multiple unrelated businesses, portfolio management helps to develop restructuring strategies that can improve the performance of individual businesses and maximize overall shareholder value. It involves analyzing the performance and potential of each business unit and making strategic decisions about resource allocation, investment, and divestment. Effective portfolio management can help companies identify new growth opportunities, divest underperforming businesses, and align their overall strategy with market opportunities and competitive pressures.
