Which statement best describes the difference between related and unrelated diversification?

• A. Related Means Entering New Markets; Unrelated Means Product Development
• B. Unrelated Diversification Is a Form of Vertical Integration
• C. Related Retains Connections to Existing Activities; Unrelated Does Not
• D. Related Is Always Superior to Unrelated

Answer: (C)

The main idea being tested is how closely the new business is tied to what the firm already does. Related diversification keeps connections to existing activities—whether through technology, processes, brands, or distribution channels—so the firm can share resources and capabilities across businesses and potentially gain synergies and economies of scope. Unrelated diversification moves into businesses with no meaningful link to current activities, making it harder to leverage shared resources and increasing managerial complexity, though it can diversify risk financially.

That’s why the correct statement is that related retains connections to existing activities while unrelated does not. The other options misstate the relationship: entering new markets versus product development isn’t a reliable differentiator, unrelated diversification isn’t a form of vertical integration, and related is not always superior—the outcomes depend on context and execution.