Companies diversify their operations by entering businesses and this could be done by foraying into related or unrelated business operations (Dess et al, 2021). Related diversification is diversifying into business lines in the same or similar industries while unrelated diversification means diversification into a completely different industry (Kennedy, 2020).

An example of related diversification is the purchase of ABC Studios by Disney since both companies are in the entertainment industry (Kennedy, 2020). In this form of diversification, companies can leverage the sharing of intangible resources such as marketing or tangible resources such as production facilities; distribution channels etc., through pooled negotiating power and vertical integration thus creating synergies (Dess et al, 2021). Diversification affords a company the ability to exploit core competencies that are difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business (Prahalad & Hamel, 1990).

On the other hand, the purchase of Columbia Pictures by Coca-Cola is an example of unrelated diversification (Kennedy, 2020). While in theory unrelated diversification helps to spread the business risk, in practice most unrelated diversification is not very successful (Kennedy, 2020). In order to succeed with the strategy of unrelated diversification, a vast array of diversified skill is required along with a large amount to capital input but this does not limit the downside risk (Cyriac et al, 2012).

Thus, we can surmise that related diversification is better than unrelated diversification.

References

Cyriac, J., Koller, T. & Thomsen, J. (2012, February 01). Testing the limits of diversification. McKinsey & Company. Retrieved from https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/testing-the-limits-of-diversification

Dess, G., McNamara, G., Eisner, A. & Lee, S. (2021). Strategic Management: Text and Cases, (Tenth Edition). McGraw Hill.

Kennedy, R. (2021). Strategic Management. Virginia Tech Publishing.

Prahalad, C. K., & Hamel, G. (1990). The core competencies of the corporation. Harvard Business Review, 86(1), 79-91.

I need answer for this as a argument with it references. This is a discussion forum