Answer:
The type of diversification you are referring to is called unrelated diversification, also known as conglomerate diversification. Unrelated diversification occurs when a firm enters a different business that has little horizontal interaction with other businesses of the firm. This strategy involves expanding into industries or markets that are not related to the company's existing core business, products, or services. The primary goal of unrelated diversification is to reduce risk by spreading investments across various industries and markets.
Unrelated diversification can be achieved through various means, such as mergers and acquisitions, joint ventures, or internal development of new products or services. This strategy allows companies to capitalize on their strengths and resources while minimizing the impact of industry-specific risks. However, it also presents challenges in terms of managing diverse businesses and maintaining focus on core competencies.
Some advantages of unrelated diversification include:
1. Risk reduction: By investing in different industries, a company can reduce its exposure to risks associated with a single industry or market.
2. Growth opportunities: Diversifying into unrelated businesses can provide new growth opportunities that may not be available within the company's existing industry.
3. Resource utilization: Companies can leverage their resources, such as management expertise or financial strength, to enter new markets and gain a competitive advantage.
Some disadvantages of unrelated diversification include:
1. Lack of synergy: Unrelated businesses may not benefit from synergies that could be achieved through related diversification strategies.
2. Management challenges: Managing a diverse portfolio of businesses can be complex and may require additional resources and expertise.
3. Dilution of focus: Expanding into unrelated industries may cause a company to lose focus on its core competencies and weaken its competitive position in its original market.