The rationale behind related diversification is to
obtain only 10 percent of the revenues from the primary business activities
limit learning-curve and experience-curve effects
benefit from economies of scale and scope
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 occurs when a company expands its operations into a new business area that is related to its existing business lines. The primary rationale behind this strategy is to capitalize on the synergies that exist between the new and existing businesses, which can help the company achieve cost savings, revenue growth, and competitive advantages.
One of the key benefits of related diversification is economies of scale. When a company diversifies into related industries, it can spread its fixed costs, such as research and development, marketing, and administrative expenses, across a larger base of operations. This allows the company to reduce the per-unit cost of production as the volume of its operations increases. For example, a company in the automotive industry might diversify into manufacturing automotive parts, which allows it to share manufacturing capabilities and logistics between its different lines of business, achieving economies of scale.
Another benefit is economies of scope, which occur when a company can share resources, capabilities, or expertise across its different business lines. For instance, a company that makes electronic devices might also produce household appliances. The technological expertise and production facilities it already has in electronics can be leveraged to enter the new market, reducing the need for large investments in new capabilities.
In contrast, if the businesses are unrelated, the company may not achieve these synergies and could face higher costs or inefficiencies due to the lack of shared resources or experience.
The other options provided—such as avoiding sharing resources, limiting learning-curve benefits, and obtaining a small share of revenues from the primary business—do not align with the typical strategic goals of related diversification. Instead, companies aim to leverage shared capabilities to maximize both cost efficiency and innovation opportunities across related markets.