A company that pursues diversification seeks to expand into product markets where the main success factors are not directly related to one another. In this scenario, development through diversification involves little or no transfer of functional skills between various activities.
Diversification is optimized when the specific skills and industrial knowledge of one partner in the merger are applied to the problems and competitive opportunities of the other. While operational synergies are commonly emphasized to justify acquisitions, financial synergies are often overlooked.
Diversification presents potentially significant benefits
Related diversification becomes an attractive strategic option when a company can export or import excess skills or resources that are useful in its competitive environment.
Unrelated diversification may be the best strategic option when a company possesses the skills and resources to analyze and manage the strategies of vastly different businesses.
Ultimately, when a diversifying company has both capabilities, the choice of a viable strategy will depend on the skills and personal inclinations of its senior executives. By pursuing diversification, a company can expand its reach, mitigate risks associated with concentrating on a single market, and ultimately increase overall stability and growth potential.
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