What are the key factors to consider when choosing between related and unrelated diversification?

1 Related diversification

Related diversification means adding new products or services that are similar or complementary to your existing ones. For example, a car manufacturer might diversify into electric vehicles, or a clothing retailer might diversify into accessories. The main advantage of related diversification is that you can leverage your core competencies, such as technology, brand, or distribution, to create synergies and economies of scale. You can also cross-sell and upsell to your existing customers, and enhance your reputation and loyalty. However, related diversification also has some drawbacks. You might face increased competition, cannibalization, or saturation in your industry. You might also lose focus on your core business, or overestimate your capabilities and resources.

2 Unrelated diversification

Unrelated diversification means adding new products or services that are unrelated or dissimilar to your existing ones. For example, a media company might diversify into hospitality, or a pharmaceutical company might diversify into cosmetics. The main advantage of unrelated diversification is that you can reduce your exposure to market fluctuations, technological disruptions, or regulatory changes. You can also explore new opportunities and markets, and diversify your income sources. However, unrelated diversification also has some challenges. You might lack the expertise, knowledge, or network to succeed in the new domain. You might also face higher costs, risks, or complexity in managing multiple businesses. You might also dilute your brand identity, or alienate your core customers.

3 Strategic fit

One of the most important factors to consider when choosing between related and unrelated diversification is the strategic fit. This means how well the new business aligns with your vision, mission, values, and goals. You need to assess whether the new business will support or hinder your long-term objectives, and whether it will create value for your stakeholders. You also need to evaluate whether the new business matches your strengths, capabilities, and resources. You need to identify the gaps and opportunities in the market, and how you can fill them with your unique value proposition. You also need to consider the potential synergies and trade-offs between your existing and new businesses.

4 Financial performance

Another key factor to consider when choosing between related and unrelated diversification is the financial performance. This means how the new business will affect your profitability, growth, and risk. You need to analyze the expected returns, costs, and cash flows of the new business, and compare them with your current ones. You also need to estimate the payback period, break-even point, and return on investment of the new business, and how they will impact your overall financial position. You also need to consider the market size, demand, and competition of the new business, and how they will influence your pricing, margins, and market share.

5 Organizational culture

A final factor to consider when choosing between related and unrelated diversification is the organizational culture. This means how the new business will fit with your existing culture, values, and norms. You need to assess whether the new business will enhance or clash with your organizational identity, vision, and mission. You also need to examine whether the new business will require different skills, structures, processes, or systems than your current ones. You also need to consider the potential conflicts, resistance, or integration issues that might arise from the new business, and how you can address them.

Diversification is a powerful strategy that can help you grow your business and achieve your goals. But you need to choose wisely between related and unrelated diversification, depending on your situation and preferences. By considering these key factors, you can make a more informed and effective decision that will benefit your P&L management.