What is the strategy of related diversification?

The strategy of related diversification focuses on a company expanding its operations by adding businesses that are involved in similar products or markets. This approach allows the company to leverage its existing expertise, resources, and market presence to achieve synergies that can lead to increased efficiency, reduced risk, and enhanced profitability. By diversifying in areas that are related to the core business, a company can benefit from economies of scale, shared marketing strategies, and improved innovation through the combination of related technologies or processes.

For instance, a company that produces soft drinks might pursue related diversification by acquiring or developing a brand of snack foods, allowing it to capitalize on its distribution channels and branding expertise while reaching a similar customer base. This interconnectedness between the markets or products reduces the risk typically associated with entering completely unrelated industries, where unfamiliarity can lead to challenges in operating effectively.