Which is the better approach to diversification-a strategy of related diversification or a strategy of unrelated diversification? Explain and support your answer.
What will be an ideal response?
Any approach to diversification is fine as long as it provides a clear avenue for increasing shareholder value. Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts a company's businesses in position to perform better financially as part of the company than they could have performed as independent enterprises, thus providing a clear avenue for increasing shareholder value and satisfying the better-off test. Where unrelated business are concerned, unless the combination of businesses is more profitable together under the corporate umbrella than they are apart as independent businesses, the strategy cannot create economic value for shareholders. And unless it does so, there is no real justification for unrelated diversification, since top executives have a fiduciary responsibility to maximize long-term shareholder value for the company's owners (its shareholders).
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Indicate whether the statement is true or false.