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. There are four key reasons why businesses adopt a diversification strategy: Let's look at some of the best examples of business diversification strategies in action. 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 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. Diversification can be a good idea for a business in several situations: 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. 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, 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, 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 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. Here are some examples of business diversification strategies: 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: If you would like to discuss your diversification objectives with the Genus team, get in touch today.What is diversification?
Why is diversification important in business?
Examples of Diversification: Apple
Examples of Diversification: Amazon
When is diversification a good idea?
When is diversification not a good idea?
Harley Davidson’s “Legendary Eau de Toilette”
Virgin Cola
Google Glass
Types of business diversification
How management accounts can benefit diversification strategy
Related articles
Tags: GENUS Management Accounts
As an expert in business strategy and diversification, my extensive knowledge in the field allows me to provide insightful analysis and evidence-based information on the concepts discussed in the article. I have a deep understanding of the importance of diversification in business and can draw on real-world examples to illustrate key principles.
Diversification in business refers to the strategic expansion of a company's operations into new or unrelated products, services, markets, or industries. The primary goal is to reduce overall business risk and generate new sources of revenue. A successful diversification strategy can rejuvenate struggling businesses and extend the success of already profitable ones.
The article outlines four key reasons why businesses adopt diversification strategies:
- Revenue Generation: Companies diversify to increase their revenue streams.
- Risk Management: Diversification helps spread investments, reducing economic risk.
- Core Business Decline: When a company's core business is in decline, diversification provides alternative growth opportunities.
- Synergy Exploitation: Businesses diversify to leverage potential synergies between different products or services.
The article provides two exemplary cases of successful business diversification:
1. Apple:
- Apple's diversification journey began with the Macintosh personal computer in 1984.
- Facing decline in the mid-1990s, Apple rebounded with the iPod in 2001 and the iPhone in 2007.
- Operational synergies were crucial, allowing resource and capability sharing between different product groups.
- Apple further diversified into tablets, watches, smart audio, and electric vehicles.
2. Amazon:
- Originally an online bookseller, Amazon diversified into video games, consumer electronics, software, homeware, toys, and more.
- Amazon's goal was to transform from an ecommerce website to a tech giant, exemplified by the launch of AWS.
- Further diversification included the Kindle e-reader, Amazon Echo smart speaker, and expansion into various industries.
The article also discusses when diversification is a good idea, citing situations such as market saturation, risk management, increased competitiveness, and improved stability. Conversely, it emphasizes that diversification is not always advisable, especially if a company lacks familiarity with the new market or resources to manage a diverse range of products and services.
Additionally, the article provides cautionary examples of unsuccessful diversification:
- Harley Davidson's "Legendary Eau de Toilette": A fragrance line that clashed with the motorcycle brand, leading to dissatisfaction among fans.
- Virgin Cola: An unsuccessful attempt to compete with major beverage companies like Coca Cola and Pepsi, with only a 3% market share in the UK.
- Google Glass: Despite Google's resources, Google Glass faced issues such as poor battery life, privacy concerns, and bugs, resulting in discontinuation after two years.
The article concludes by presenting various types of business diversification strategies, including product, market, industry, and service diversification, as well as mergers & acquisitions, joint ventures, and expansion into new geographic regions. It highlights the role of management accounts in aiding diversification by providing insights into financial performance, assessing feasibility, managing risk, and monitoring performance.
