A company should pursue related diversification instead of unrelated diversification when the company's:
A) core skills are applicable to a wide variety of industrial and commercial situations.
B) core skills are highly specialized and have few applications outside the core business.
C) top managers are skilled at acquiring and turning around poorly run enterprises.
D) main objective is to maximize its growth.
E) free cash flow is high enough that it has funds available for investment.

Question

Quizplus · Accepted Answer

Pursuing related diversification allows a company to leverage its core skills and knowledge across different industries or markets, which enhances its competitive advantage and increases the chances of success. If a company's core skills are highly specialized and have few applications outside of the core business (B), it may be more difficult to find related diversification opportunities, and unrelated diversification may be more appropriate. Similarly, if the company's top managers are skilled at acquiring and turning around poorly run enterprises (C), they may be better suited for unrelated diversification, where they can apply their turnaround skills to different industries. However, maximizing growth (D) or having high free cash flow (E) does not necessarily dictate the type of diversification strategy a company should pursue.

A Company Should Pursue Related Diversification Instead of Unrelated Diversification