Marco Giarratana and Juan Santaló, Professors of Strategy at IE Business School Show
The classical answer to this question in Business School classes would be “synergies”, and most of the cases that we teach focus on how to calculate synergies– that is to say, cost and demand. However, with respect to strategy, the discussion has shifted recently towards new horizons. The competitive advantage of diversified companies is due in large part to their ability to move resources quickly –financial, human, technological– from one product niche to another when the sector conditions change. It is a competitive advantage because specialized companies cannot quickly do this. The approach is defined as “resource redeployment”. In our article, Transaction Costs in Resource Deployment for Multiniche Firms, we try to define the industry conditions under which this advantage is higher. Drink Sector as an ExampleWe find two interesting results for the drink industry. When the retailers are concentrated and have more power (i.e., big supermarket chains) diversified companies have more advantages vis-à-vis a specialized company. Second, when a particular product niche is populated by an increasing number of specialized producers that compete against each other, (i.e., in the beer niche, an increasing number of specialized craft beer producers) again, diversified companies have an advantage. Why? Specialized producers suffer a cost increase for shifting a product from one niche to another due to the fragmentation of the niche competition market. Indeed, to measure this effect, we examined the implementation of tax increases on alcoholic products during several years in eight European countries. What we find is quite interesting. In the alcoholic niches, the companies that suffer more (fewer sales) are the diversified companies. But diversifiers, after the tax on alcohol, actually saw their sales rise for all the other drink niches that are not alcoholic (water, juices,..). This is because diversifiers can react to market changes by moving resource (mostly shelf space) from one product to another. We also find that the biggest diversifiers are even able to increase their overall corporate sales after a negative shock like a tax that hits one of the product niches, thanks to their ability to adapt quickly to the new demand change. A great surprise, profiting from a negative shock! What is the takeaway?Diversifiers tend to benefit from turbulence in the sector, precisely because turbulence challenges their competitors to adapt. And diversified companies are better at doing this. They benefit from instability for different product niches. Conversely, they tend not to like very stable environments. And—perhaps most noteworthy– they benefit from environments where specialized producers face added costs for adapting— like current market conditions. However, redeployment and diversification imply several organizational costs. Managers should take care to make these internal processes as efficient as possible.  What is diversification?Diversification is a business development strategy in which a company develops new products and services, or enters new markets, beyond its existing ones. Diversification strategy can kick-start a struggling business, or it can further extend the success of already highly profitable companies. Why is diversification important in business?There are four key reasons why businesses adopt a diversification strategy:
To learn more about how diversification works as part of a business development strategy, check out our in-depth blog on the subject. For now, though, we’re going to look at some the best examples of business diversification strategy in action. AppleOne of the most famous companies in the world, Apple Inc. is perhaps the greatest example of a “related diversification” model. Related diversification means there are notable commonalities between the existing products and services, and the new ones being developed. Once upon a time (1984), Apple launched the Macintosh personal computer. They had released products prior to this, such as the Apple I motherboard, but the Macintosh and related personal computing products defined Apple’s early success. A period of decline hit the company during the mid-1990s, with Microsoft delivering a cheaper and simpler (albeit less powerful) PC alternative. Towards the end of the 1990s, Apple was approaching bankruptcy. Then it all changed. In 2001, Apple launched the iPod and subsequent iTunes software (2003). Later, Apple would truly hit the diversification jackpot with the launch of the revolutionary iPhone in 2007. With modern smartphones and digital music players sharing features with computers, it’s easy to forget that, before the 2000s, computers and mobile phones bore next to no similarities from a consumer perspective. But operational synergies in manufacturing allowed Apple to share resources and capabilities between the two product groups, as the smartphones Apple developed used many of the same resources and design principles as their computers. Apple didn’t stop there, though. The company has since diversified into tablets, watches, smart-audio, and even electric vehicles. Apple’s diversification strategy at the turn of the millennium not only saved the corporation from impending failure but helped them grow into one of the biggest corporations on Earth. AmazonLike Apple, Amazon is one of the world’s largest and most well-known companies, generating a mouth-watering $386 billion in 2020. Amazon’s initial operation was that of an online bookseller, and it was a very successful one after its launch in 1995. Books were easy to source and distribute, but company founder Jeff Bezos always planned to diversify. The website began selling videogames and other multimedia in 1998 and, before long, the company sold consumer electronics, software, homeware, toys and more. The long-term goal of Amazon was always to diversify from an ecommerce website to a fully loaded technology company. Midway through the Noughties, Amazon launched AWS (Amazon Web Services), which delivers on-demand cloud computing platforms and APIs; suddenly they were a long way away from just selling books. From web services and ecommerce to consumer electronics, Amazon diversified further as they launched the Kindle e-reader and later the Amazon Echo smart speaker system – in a remarkably similar trajectory to what Apple had followed previously, they also entered the digital music industry with Amazon Music. Skip ahead to the present day, and Amazon has its own airline (Amazon Air), cloud storage platform, movie studio, and much more. The diversification of Amazon is as impressive as it is concerning for competitors and is possibly the highest profile example of strategic relatedness in business diversification. When Diversification goes wrongDiversification is not a sure-fire way to ensure success. In fact, diversification as a business development strategy offers a considerably higher risk than product and market development, or increased market penetration. This means it sometimes goes wrong. Harley Davidson’s “Legendary Eau de Toilette”That’s right, Harley Davidson, famous for its iconic motorcycles, diversified into the fragrance industry in the 1990s. A notable example of over-extending a brand, this perfume angered the Harley Davidson fanbase and prompted more careful diversification strategy from the company from then on. The lesson: Be careful of brand clashes when diversifying. Virgin ColaThe Virgin Group, which began selling records, is a fantastic example of long-term diversification strategy in action, with Virgin Media, Virgin Holidays and Virgin Money enjoying considerable success. But even the best occasionally gets it wrong, which is exactly what happened when Virgin decided to take on Coca Cola and Pepsi with Virgin Cola. Virgin Cola only managed a market share of 3% in the UK. Because of the size of the Virgin Group, they were able to survive and move on from this failure. Smaller corporations may not have done. The lesson: When diversifying, be realistic about your product’s appeal against that of your competition. Google GlassLike Amazon and Apple, Google is a behemoth of a corporation, with near limitless budget, resources, and know-how. Despite this, they can also get diversification quite wrong – which is exactly what happened with their 2013 foray into wearable hardware, Google Glass. Heralded as a wearable, user friendly, non-intrusive alternative to a smart-phone, Google Glass was discontinued after just 2 years after complaints about poor battery, privacy concerns, numerous bugs and even a ban from use in public spaces. The lesson: Make sure your product is fit for purpose and has legitimate appeal. How to get Diversification strategy rightDiversification is a high-risk business development strategy. When entering new markets with new products, preparation and planning is essential. The “Three Tests of Diversification value” is a great place to start, and we strongly recommend asking yourself the following questions when thinking about diversification strategy.
The Genus team at shorts recently took part in a special event with Lucidity, where we presented the dos and don’ts of diversification, and in-depth advice that can be applied to any company, not just the Silicon Valley tech giants! You can watch the full video below – if you would like to discuss your diversification objectives with the Genus team, get in touch today. Free Diversification ToolkitAre you considering diversifying your business? If so, you can download our free, interactive Diversification Toolkit today. The toolkit gives you all the tools you need to decide if diversification is right for your business, and how to plan and effectively execute your diversification strategy. Download the free Diversification Toolkit here How would you explain the difference between a single business company and a multi business company?Free-standing entities focus on maximizing a single profit & loss statement, while multibusiness firms focus on creating higher shareholder value as a combined entity than the individual business units could attain on their own.
What are the differences between single business & business diversification strategies?In a single-business approach, you rely on one product or product line, business format or customer base to generate all revenue. In a diversification strategy, you use a mix of product lines, business formats or customer markets.
When a company is diversified and owns multiple different businesses they are considered a what?A conglomerate is a corporation made up of several different, independent businesses. In a conglomerate, one company owns a controlling stake in smaller companies that each conduct business operations separately.
What does it mean when a business is diversified?Diversification is a growth strategy that involves entering into a new market or industry - one that your business doesn't currently operate in - while also creating a new product for that new market.
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