Related diversification is a strategy in which a company creates products similar to existing ones rather than expanding into unrelated areas. For example, in the case of a coffee shop, related diversification might include selling teas, coffee-making equipment and accessories, and snacks, while unrelated diversification might include opening a clothing store or ride-sharing service.
Related diversification allows companies to develop several advantages in building on an existing customer base. For example, imagine if XYZ Coffee starts out as a small artisanal coffee shop, selling freshly brewed coffee, coffee beans, and a small selection of desserts. If XYZ added coffee-brewing equipment, including coffee filters and other frequently purchased items, they would have a competitive advantage in that a customer dropping by for a cup of coffee might pick up a package of filters rather than making a separate trip to the supermarket. In other words, one important advantage of related diversification is that it leverages the attention of an existing customer base.
A second advantage of related diversification is branding. If a brand is already familiar to customers, it can influence purchases in a related but not unrelated area. For example, Starbucks-brand coffee drinks and coffee-related products leverage an existing brand identity in a way that Starbucks-themed running shoes would not, as Starbucks is known for its coffees but not its running shoes. The Starbucks name would have an advantage over other companies in coffee-related merchandise because it has a strong reputation in the area.