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Related and unrelated diversification

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In one minute

Moving into a new line of business, close to what you do or far from it.

The big idea: A new business is worth entering when something you already have (customers, a brand, a skill, spare capacity, cheap capital) makes you better at it than a new entrant. Without that shared advantage, owners could diversify more cheaply by buying shares themselves.

Works when
When the new business shares real assets with the old one: customers, technology, a brand, a network or know-how.
Fails when
When the only link is spare cash, managers stretch too thin, and the new business never earns its cost of capital.
Check this number first
Size and growth of the new market. Is it worth the effort?
In the worked example
Extra profit a year: USD 38 (USD millions a year, by year five). See it add up

What it is

Diversification means adding a different business. Related diversification shares something with what you already do: an online shop that rents out its computing power, a telecom firm that adds payments. Unrelated diversification has no real link, like an oil company buying a fashion brand. Groups that own many unrelated businesses are called conglomerates.

  • Related. The new business uses the same customers, technology, brand, network or skills.
  • Unrelated. The new business has no operating link; the group shares only money and management.

Why companies do it

The economic logic, most important first. A move usually rests on one or two of these.

  • Growth. The core market is slowing, and the company has cash and people to put to work.
  • Scale. Shared assets (a brand, a customer base, a network, data centres) are spread over more revenue, so costs per unit fall in both businesses.
  • Risk. Profit from two businesses with different cycles is steadier. Owners can get this themselves by holding different shares, so it is a weak reason on its own.
  • Customer relationship. Selling more to customers you already have costs much less than winning new ones.

When it creates value, and when it destroys it

Creates value when

  • There is a shared asset that gives a real cost or revenue advantage in the new business.
  • The new market is growing and earns more than the cost of capital.
  • The group runs each business with clear targets and lets it keep the profit it earns.
  • In markets where capital and skills are scarce, a strong group can fund and staff a new business that others cannot.

Destroys value when

  • The link is only spare cash, and management attention is pulled away from the core.
  • Strong businesses subsidise weak ones for years.
  • The stock market values the group at less than its parts would fetch apart (a conglomerate discount).
  • The company overpays to buy its way in.

The numbers to check

Ask for these, in this order, before you recommend the move.

  1. Size and growth of the new market. Is it worth the effort?
  2. Return on capital in the new business against the cost of capital. Entering a market that earns below its cost of capital destroys value however fast it grows.
  3. The shared costs or extra sales that come from owning both. This is the only thing an owner could not get by buying shares in each.
  4. Investment needed and years to break even. Diversification often takes years of losses before profit.

Worked example (illustrative)

Rounded numbers for a made-up business, shaped like real ones. Positive lines add to profit; negative lines are costs.

A company invests USD 400 million to enter a related business. In year five it expects USD 300 million of sales at a 12 percent margin, and it can share a sales force and brand with its core business.

Worked example for Related and unrelated diversification, in USD millions a year, by year five. Illustrative figures.
LineUSD millions a year, by year five
Profit from the new business: USD 300 million x 12 percentUSD 36
Costs saved by sharing a sales force and brandUSD 6
Extra head office and management timeminus USD 4
Extra profit a yearUSD 38

Check: the lines above add up to the total.

The numbers that decide it

Return on the USD 400 million invested
9.5 percent
Return without the shared costs (an unrelated business)
8 percent

So what: The shared sales force and brand lift the return from 8 to 9.5 percent. Against a 10 percent cost of capital, even the related version falls short in year five, so the case rests on growth after that. The unrelated version has no shared advantage at all.

Real examples

Companies that made this move, by region, with what happened and a source checked on the date shown.

  • Reliance Industries

    IndiaCreated value

    An oil refining and chemicals group that built a mobile network (Jio) and a retail chain. In 2024-25 its digital services business earned EBITDA of Rs 65,001 crore, more than its oil to chemicals business at Rs 54,988 crore, and its retail business had revenue of Rs 3,30,943 crore.

    The lesson: Diversification paid where the group could fund a national network few rivals could match and sell to the same hundreds of millions of customers in telecom and retail.

    Source 1: Reliance Industries, Integrated Annual Report 2024-25 (opens in a new tab), checked .

  • Amazon

    United StatesCreated value

    Amazon sells cloud computing to outside customers through Amazon Web Services (AWS), a business far from its original online shop. In 2025 AWS had USD 128.7 billion of sales and USD 45.6 billion of operating income, more than half of Amazon's USD 80.0 billion total.

    The lesson: Related diversification works best when a capability you already built for yourself is better than what the market offers.

    Source 2: Amazon.com, fourth quarter 2025 results release (Exhibit 99.1 to Form 8-K, US SEC), 5 February 2026 (opens in a new tab), checked .

  • Grab

    Southeast AsiaMixed

    Grab added loans and digital banking to its ride-hailing and delivery app. In 2025 financial services revenue grew 37 percent to USD 347 million and its loan book more than doubled, but the segment still lost money.

    The lesson: Selling a new service to customers you already have is cheap; lending still needs capital and years before it earns its keep.

    Source 3: Grab, "Grab Reports Fourth Quarter and 2025 Results with First Full Year Net Profit", 12 February 2026 (opens in a new tab), checked .

  • General Electric

    United StatesDestroyed value

    GE built a large finance arm, GE Capital, beside its industrial businesses. In 2015 it decided to sell most of GE Capital and expected about USD 23 billion of after-tax charges from the exit.

    The lesson: A finance arm can look profitable in good years while carrying risks an industrial group cannot see or control; the link was only money.

    Source 4: General Electric, Form 8-K (US SEC), July 2015 (opens in a new tab), checked .

How to recommend it in a case

Answer first, then the reasons with numbers, then the risk and the next step. Three sentences, said out loud.

I recommend entering only if we can grow the new business beyond USD 300 million of sales, because at that size it returns about 9.5 percent on USD 400 million, just below our 10 percent cost of capital.

The case rests on what we share: one sales force and our brand add about USD 6 million a year, which a stand-alone entrant would not have.

The risk is that it pulls management away from the core; next I would test the market growth rate and whether a partner could share the investment.

The numbers to quote: Return on capital in the new business; Value of what is shared; Investment and years to break even; Market size and growth.

The figures in the answer come from the illustrative worked example above. In a case, use the client's own numbers.

Classic interview traps

  • Saying "it spreads risk". Owners can spread risk more cheaply themselves; say what is shared instead.
  • Judging the new market by growth alone. Growth below the cost of capital destroys value faster.
  • Ignoring the years of losses before the new business pays.

Where it is common

Sources

Practise it

Where this move comes up in cases

Related moves