What is diversification?
Business diversification refers to expanding a company's operations into new or unrelated products, services, markets, or industries.
The goal of diversification is often to reduce the overall risk of the business and to generate new sources of revenue. A good diversification strategy can kick-start a struggling business. It can also extend the success of already profitable companies.
Why is diversification important in business?
There are four key reasons why businesses adopt a diversification strategy:
- The company wants more revenue
- The company wants less economic risk
- The company’s core business is in decline
- The company wants to exploit potential synergies
Let's look at some of the best examples of business diversification strategies in action.
Apple
One of the most famous companies in the world, Apple Inc. is one of the greatest examples of a “related diversification” model.
Related diversification means there are commonalities between existing products/services and new ones in development.
Once upon a time (1984), Apple launched the Macintosh personal computer. They had released products before this, like the Apple I motherboard, but the Macintosh defined Apple’s early success.
A period of decline hit the company during the mid-1990s. Microsoft had been 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 iTunes software (2003). This was a success. Apple would hit the diversification jackpot a few years later with the iPhone in 2007.
It’s easy to forget that computers and mobile phones bore next to no similarities from a consumer perspective before the smartphone.
Operational synergies let Apple share resources and capabilities between the two product groups. The iPhone used many of the same resources and design principles as Apple's computers.
Apple didn’t stop there, though. The company has since diversified into tablets, watches, smart-audio, and even electric vehicles.
Diversification strategy saved Apple from failure, and helped them grow into one of the world's biggest corporations.
Amazon
Amazon is one of the world’s largest and most well-known companies. They generated a mouth-watering $386 billion in 2020.
Amazon was originally an online bookseller, and it was a very successful one after its launch in 1995. Books were easy to source and distribute but Jeff Bezos planned to diversify.
Amazon began selling video games and other multimedia in 1998. Before long, the company sold consumer electronics, software, homeware, toys and more.
The goal of Amazon was always to diversify from an ecommerce website to a fully loaded tech giant.
Amazon later launched AWS (Amazon Web Services). AWS delivers on-demand cloud computing platforms and APIs. They were now a long way away from just selling books.
Amazon diversified further as they launched the Kindle e-reader and later the Amazon Echo smart speaker system. This is a very similar trajectory to what Apple had followed before. 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 worrying for competitors. It is the highest profile example of strategic relatedness in business diversification.
When is diversification a good idea?
Diversification can be a good idea for a business in several situations:
- Market saturation: When the market for a particular product or service becomes saturated, diversifying can help a business reach new customers.
- Risk management: By diversifying, a business can spread its investments and reduce the impact of risks.
- Increased competitiveness: Diversifying can allow a business to offer a wider range of products or services, attract new customers, and reach new markets that competitors can't or don't.
- Improved stability: Diversifying can help stabilize a business by reducing its dependence on a single product or market.
Therefore, it's important for a business to carefully consider the costs and benefits of diversification before making a decision. Better still, download our free diversification toolkit to see if it's the right move for you.
When is diversification not a good idea?
Diversification is not always a good idea. It can be risky, especially if a business is not familiar with the new market it is entering or if it lacks the resources to effectively manage a diverse range of products and services.
There are countless other issues that can arise, and even some of the world's largest companies have gotten it wrong.
Harley Davidson’s “Legendary Eau de Toilette”
Harley Davidson, famous for its iconic motorcycles, diversified into fragrances in the 1990s.
A notable example of over-extending a brand, this perfume angered the Harley Davidson fanbase. The failed launch prompted more careful diversification strategy from the company thereafter.
The lesson: Be careful of brand clashes when diversifying.
Virgin Cola
Virgin, which began selling records, is another example of long-term diversification strategy. Virgin Media, Virgin Holidays and Virgin Money have all seen considerable success.
But even the best occasionally gets it wrong. That 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: Be realistic about your product’s appeal alongside the competition.
Google Glass
Google is a behemoth of a corporation, with near limitless budget, resources, and know-how. Even they can get diversification wrong. This is exactly what happened with their 2013 foray into wearable hardware, called Google Glass.
Google heralded the device as a wearable, user friendly, non-intrusive alternative to a smart-phone. But the product was discontinued after just 2 years. The release was hit by complaints about poor battery, privacy concerns, bugs and even a ban from use in public spaces.
The lesson: Make sure your product is fit for purpose and has legitimate appeal.
Types of business diversification
Here are some examples of business diversification strategies:
- Product diversification: A company that primarily sells clothing might expand into selling home goods and accessories.
- Market diversification: A company that sells only in the domestic market might expand into international markets.
- Industry diversification: A company that operates in the tech industry might diversify into the healthcare industry.
- Service diversification: A company that provides only consulting services might diversify into offering training services.
- Mergers & Acquisitions: A company might diversify by acquiring or merging with another company that operates in a different product, service, market, or industry.
- Joint ventures: A company might diversify by forming a joint venture with another company to jointly develop and market new products or services.
- Diversifying into new geographic regions: A company that operates in only one region might expand into new geographic areas.
How management accounts can benefit diversification strategy
Management accounts can aid diversification by providing valuable insights into a company's financial performance and position, which can help management make informed decisions about diversification opportunities.
Here are a few ways in which management accounts can aid diversification:
- Identify areas of strength and weakness: Management accounts can provide a detailed breakdown of a company's financial performance, highlighting areas of the business that are performing well and those that need improvement. This information can help management identify which areas of the business are best suited for diversification.
- Assess financial feasibility: Management accounts can help assess the financial feasibility of diversification opportunities by providing detailed financial projections and analysis.
- Manage risk: Diversification inherently involves taking on additional business risk, and management accounts can help manage this risk by providing detailed financial analysis and forecasting.
- Monitor performance: Once a diversification strategy has been implemented, management accounts can help monitor the performance of the new business lines or products. This information can help management make informed decisions about the ongoing viability of the new ventures and make necessary adjustments.
If you would like to discuss your diversification objectives with the Genus team, get in touch today.
