Final answer:
A company may pursue a related diversification strategy over an unrelated diversification strategy to leverage its existing competencies in new but similar industries, leading to improved resource utilization, cost savings, and a broader product range while reducing the risks associated with moving into entirely unrelated markets.
Step-by-step explanation:
The main reason a company may choose to pursue a related diversification strategy instead of an unrelated diversification strategy is because the company's competencies can be applied across a greater number of industries. When a company focuses on related diversification, it leverages its existing knowledge, resources, and capabilities to expand into new but similar markets. This approach is different from unrelated diversification, where a company expands into industries and markets with no significant connection to its current business operations.
Related diversification allows a company to apply its core competencies to new opportunities. This can lead to more efficient utilization of resources, cost savings due to economies of scale, and the ability to provide a wider array of products or services without incurring proportionately higher costs. Moreover, it can lead to improved competitiveness as the company can offer a broader portfolio to its existing customer base while also attracting new customers.
However, when a company uses unrelated diversification, it often requires acquiring new sets of skills and knowledge, which can be challenging and may not always capitalize on the firm's existing strengths. Transitioning into unrelated markets also carries a higher risk due to the lack of familiarity and expertise with the new industry.