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CS Professional · Strategic Management and Corporate Finance · Managing the Multi-Business Firm and Analyzing Strategic Edge

A listed Indian FMCG company acquires a packaged snacks firm and plans to share its distribution network, brand strength and procurement across both businesses. Which benefit of related diversification is it mainly pursuing?

The company is pursuing synergy through economies of scope, because related businesses can share distribution, brand and procurement, lowering unit costs and raising returns. Spreading risk is the aim of unrelated diversification, which does not fit this case.

  1. ASynergy through economies of scopeCorrect
  2. BPortfolio risk reduction through unrelated businesses
  3. CTax shelter from conglomerate losses
  4. DElimination of all competition in the industry

Explanation

Sharing distribution, brand and procurement across related businesses creates synergy and economies of scope. Unrelated diversification mainly aims at spreading risk, which is not the case here. The deal does not eliminate competition, and tax shelter is not the stated aim.

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