The rationale behind related diversification is to
Multiple Choice
limit learning-curve and experience-curve effects.
benefit from economies of scale and scope.
obtain only 10 percent of the revenues from the primary business activities.
avoid sharing resources and competencies across different business lines.
The correct answer and explanation is :
The correct answer is:
benefit from economies of scale and scope.
Explanation:
Related diversification refers to a strategy where a company expands its operations into areas that are related to its existing business activities, either through products, services, or industries. The rationale behind pursuing related diversification lies in the ability to leverage existing resources, capabilities, and competencies across different business lines, ultimately leading to a more efficient and effective business model.
1. Economies of Scale and Scope:
- The primary benefit of related diversification is economies of scale and scope. Economies of scale occur when a company increases its production or operational capacity, thereby reducing the cost per unit of output. By diversifying into related businesses, a company can achieve economies of scale by spreading its fixed costs over a larger number of products or services, reducing the cost per unit.
- Economies of scope refer to the cost advantages that arise from a company producing a range of related products or services. By sharing resources such as distribution channels, marketing expertise, production facilities, or R&D, a company can lower its overall costs and enhance operational efficiencies. In other words, related diversification enables a firm to exploit synergies across different but related business activities.
2. Synergies and Resource Sharing:
- Related diversification also allows a company to share resources and competencies between its various business units. For example, a company that operates in both consumer electronics and software development can leverage its expertise in technology to innovate and improve products across both sectors, creating synergies that would be harder to achieve through unrelated diversification.
- This approach avoids the inefficiencies of working in unrelated industries, where there may be fewer synergies or overlaps in resources, skills, and knowledge.
Thus, related diversification enables a company to achieve cost reductions, enhance capabilities, and increase competitiveness by leveraging its core strengths across a broader range of activities, ultimately improving overall business performance.