When is a company likely to choose (a) related diversification and (b) unrelated diversification?. Management

A company is likely to choose related diversification when it wants to benefit from transferring competences, leveraging competences, sharing resources and/or bundling resources. Simply put, companies decide to choose related diversification when their competences can be applied across a greater number of industries and the company has superior strategic capabilities that allow it to keep bureaucratic cost under close control. On the other side, companies choosing unrelated diversification are not interested in transferring competences or sharing resource between units. Instead, they benefit from an internal capital market. The companies with relatively expensive projects and investment prefer this type of diversification; the benefits of unrelated divarication allow the companies to fund their investments more cheaply than independent businesses. Unrelated diversification is preferred when each business unit's functional competences have few useful applications across industry, top managers are skilled at raising the profitability of poorly run businesses and the company's managers use their superior strategic management competences to boost the competitive advantage and keep bureaucratic costs under control.

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