Diversification mitigates risks in the event of an industry downturn. 2. The risk is in implementing resources to facilitate a new market that is untested. When consumers have multiple products with a financial institution, they are less likely to shop around and leave to a competitor. If somebody was to ask what industry Virgin operates in primarily, the first thought that comes to mind would inevitably vary between each of us. As fierce rivals with similar products and backgrounds, Pepsi and Coca-Cola have conducted much of their diversification in direct competition with each other. Advantages & Disadvantages to Corporate Strategy Diversification. The world is full of companies that found their specialty early on, built a market around that product, and decided to make it their focus. For example, BIC is said to follow a related- constrained diversification, as all of its products (razors, cigaret… They even ventured into the cruise business in 1998, when they failed to find new partners for licensed cruises to Disney World resorts. Diversification allows for more variety and options of products and services. Diversification strategy examples are prevalent in big and small businesses around the globe. Although Coca-Cola has generally ignored the snacks market, its drinks portolio almost mirrors Pepsi's. Just like the similar taste of their signature drinks, however, both firms have charted fairly similar strategies. Training facilities such as gyms and studios were even more specialized. A company can diversify its operations by either acquiring another company or merging with a company with a different line of business. Through competing in this business, Honda developed a unique ability to build small and reliable engines. Royal Philips of the Netherlands is a leading health technology company focused on improving people’s health and enabling better outcomes across the health continuum from healthy living and prevention, to diagnosis, treatment and home care. Related Diversification . A company’s diversification strategy can be either related or unrelated to its original business. Physical therapy offices offer relaxation massages as well and may even have workout classes such as Pilates. They have also diversified into fruit juices (Tropicana), energy drinks (Gatorade), mineral water (Aquafina) and, in recent years, have even signed a deal with coffee giant Starbucks to distribute certain products in Latin America. Coffee shops never had more than a donut or bagel to grab with your cup of java. The technology would be the same but the marketing effort would need to change. Show Similar Companies. Founded in 1937, the German car manufacturer had the initial mission of developing a "people's car" under the Nazi government. Initially a lighting business, General Electric diversified into medical devices and household appliances. Based in New York, Estée Lauder is one of the largest cosmetics brands in the world; it generated sales worth $15bn in 2019 alone and is present on the Fortune 500 list of the most valued companies in the US. With a related diversification strategy you have the advantage of understanding the business and of knowing what the industry opportunities and threats are; yet a number of related acquisitions fail to provide the benefits or returns originally … Concentric diversification occurs when a firm adds related products or markets. ‘Brand diversification’ commonly refers to a process of launching a new product in a new market, as seen in Ansoff’s Growth Matrix; examples of such strategy are the McCafe, Nike’s golfing collection, IBM’s business intelligence & analytics, and UberEATS. Forbes: Business Diversification: The Risk And The Reward, Strategy Business: How IKEA, Disney, and Berkshire Hathaway Succeed with Adjacencies, University of Northern Iowa: Strategic Marketing Services: Understanding Diversification, Strategy Train: 7.1.1 -- Types of Diversification. An example of conglomerate diversification would be Tata Group, which was founded in 1868 and diversified from its humble beginnings as a hotel company into a global multinational encompassing 100 individual companies. Notable examples are JP Morgan and Chase Bank or Meryll Lynch and the Bank of America. This gives consumers a different level of trust. Similarly, two firms when combined may be able to justify an expensive … Thanks to this continued diversification (other prominent products include the iPad, the Apple Watch, and Apple TV) the company has been able to create an entire ecosystem of interlinked tech products – a core driver of its entire business model. How to Remove a Bank Account From PayPal if I Am Unverified, How to Combat the Negative Side of Consumer Behavior With Societal Marketing. It even once owned the television network NBC. Credit card payments collected by DeltaQuest Media (Ireland) Ltd, Company No IE548227, Registered address: The Black Church, St. Mary’s Place, Dublin 7, Ireland. Is Diversification Necessary? ©2021 StartingBusiness PTE LTD. All rights reserved. Unrelated diversification involves entering an entirely new industry that lacks any important similarities with the firms existing industry or industries, and is often accomplished through a merger or acquisition. Strategic fit allows an organization to achieve synergy. But it gathered significant pace in the 1990s and beyond, with the company cementing its place in the entertainment and media industry through acquisitions of Miramax Films, ABC, Fox Family, Pixar, Marvel, LucasFilms, and 21st Century Fox. This diversification model is subtle, because the company isn't changing what it offers. Typically, the merger process is very expensive, and the companies need to formulate a strong long-term strategy to ensure that the diversification is beneficial to the shareholders. Examples of conglomerate diversification include General Electric, Virgin Group Ltd. and The Walt Disney Company. Horizontal diversification is a very popular growth strategy in business. Companies must survey new markets to make sure there is a need or desire and that the new business offering will be accepted by the public. among themselves, the diversification, is known as related-constrained. For decades, Apple was a brand strongly rooted in the computer and software segments of the tech industry. But many successful companies, such as Tyco and GE, continue to buy unrelated … Well-known, highly innovative companies include Intel, Google, DuPont, and all the pharmaceutical companies. Disney has also ventured successfully into family-friendly vacations through a bouquet of theme parks and hotel resorts. Unlike many entertainment companies, Disney does not solely rely on films, TV, or parks; it is well diversified and relies on its wide reach to create one of the most recognized and … When you already have a strong trust relationship with clients, it is easier to make an offer for other products or services. From 1976 onwards, they created iconic computers such as the Macintosh series, but by the late 1990s, the company was struggling in this market, falling way behind its main rival Microsoft and their hardware partners. Looking at Starbucks, the lines of people waiting for coffee during lunch breaks made it a reasonable risk to add more sandwich, salad and breakfast items to the menu. Sit down restaurants never used to offer to deliver or curbside pickup. In this case there is no direct connection with the company´s existing business - this diversification is classified as unrelated. However, the two firms together may be able to operate at an efficient level. Since Google is in the information business, in 2014 it purchased Titan Aerospace, a maker of solar-powered drones, an example of related diversification. Two smaller consumer product firms, for example, may not be able to afford an effective sales force, new product development or testing programme, or warehousing and logistics systems. When the business-units of a company share the inputs, production technologies, distribution channels, etc. Some business owners keenly realized there was more they could offer existing clients and diversified. Some firms that engage in related … Thanks to their horizontal diversification strategies, both Pepsi and Coca-Cola now own nearly all the successful beverage brands in the world, driving value and revenue far beyond their own original products. Estée Lauder also diversified into the haircare segment when it acquired Aveda in 1997, strengthening this purchase with the integration of Bumble & Bumble – a salon and hair products brand – into the company's portfolio in 2006. An example might be a pizza company branching out to offer calzones. For example, a phone company that adds or expands its wireless products and services by purchasing another wireless company is engaging in related diversification. What other successful examples of horizontal diversification have inspired you? Operates in the aircraft, defense, industrial, and finance industries worldwide. In order to illustrate this point, and demonstrate in real terms how horizontal diversification works and what it can achieve, we've compiled a list of companies that have mastered this strategy – whether through aggressive acquisition or in-house product development. Unrelated businesses are those which (1) require unique management expertise, (2) … For example, a company that manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. Their diverse lineup gives them access to a wide range of markets across the world, catering to every possible taste and customer profile. The short answer is no. In an investment portfolio, an array of investments types and companies reduces risk and increases chances for long-term gain. Diversified Company: A diversified company is a company that has multiple, unrelated businesses. In the 1990s, it acquired the hugely successful MAC and Bobbi Brown makeup brands to strengthen its hold on the cosmetics market, and gain access to new demographics. When companies open new channels of products, locations and new partnerships, they increase the chance of long-term success and increasing profits. Of course, many high-end restaurants may feel that delivery or curbside pickup degrades the image of the restaurant, but other owners make a choice to expand their market reach with convenient purchase options. Textron, Inc. Although the Walt Disney Company built its initial reputation in animation and children's cartoons in the early 20th century, the company has pursued an aggressive diversification strategy, looking at numerous ways to cater to their core demographic of children and family audiences. For example: 1. Concentric Diversification – Concentric diversification focuses on adding products and services that are related to the main product or service that the business is known for offering, typically using the same production tools or technology tools. Because it leverages strategic fit, companies that engage in related diversification are more likely to achieve gains in shareholder value. Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification. leading companies Graham Kenny 1. Corporate Finance Institute: What is Product Diversification? Diversification in business is no different. Yet Lauder started as a simple makeup and cosmetics brand in 1946, with a catalogue that included just three products: lotions, creams, and cleansing oil. Diversification is a concept that investors understand well. In 1965, for instance, Pepsi merged with the snack-food giant Frito Lay, resulting in an increased focus on snacks ( Lay's, Doritos, and Cheetos are just some of the brands in this sector owned by Pepsi). Learn More → Market diversification and product diversification are similar in that both are marketing strategies used by companies to grow or expand their business opportunities. 16 Example of Unrelated Diversification? The rationale of the related-diversified company 2.1 Relatedness based on tangible operational and market linkages 2.2 Relatedness and the cross-business transfer of competences and knowledge In order to illustrate this point, and demonstrate in real terms how horizontal diversification works and what it can achieve, we've compiled a list of companies that have mastered this strategy – whether through aggressive acquisition or in-house product development. In 1965, for instance, they acquired Audi, a premium car brand aimed at business executives and other high-income customers. Related Diversification . Under related diversification the company makes easier the consumption of its products by producing complementing goods or offering complementing services. There are several routes to successful horizontal diversification; you could develop new products in-house, leveraging your existing patents and technologies, and adding new divisions. It also seems to increase its market share to launch a new product that helps the particular company to earn profit. Netherlands. Some firms that engage in related diversification aim to develop and exploit a to become more successful. This wide diversification is what has allowed Disney to be so successful recently; Disney owns some of the biggest names in the entertainment world: ESPN, ABC, Disney theme parks, Disney cruise lines, and Pixar, just to name a few. People in the line are a captive audience and rather than walk across the street to grab a sandwich after getting the coffee adds an element of convenience. This is due to the Virgin Group partaking in whats known as unrelated diversification the fifth strategy in Ansoffs Matrix. A common example of a diversified company … An analysis of the practices of various diversified companies reveals that they seek related diversification in either of the two ways or a combination of the two. The firm still makes light bulbs and refrigerators but is also involved in businesses ranging from energy to weapons, to finance and aircraft engines. Here are our picks: Restaurants and coffee shops are always evolving. Indeed, this diversification strategy has been cultivated over a significant period, with the launch of the first Disney World theme park as far back as 1955. This company may be the very definition of a conglomerate. More and more small and large businesses in these industries have diversified to expand the market. Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification. After all, if the customer trusts the bank with his money, why wouldn't he trust the bank with investment ideas or life insurance. Even insurance companies such as State Farm and Allstate offer bank products and limited investment products. Altogether, the Volkswagen Group has around 15 unique brands in their passenger and commercial vehicles segments as of 2020. Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries (Figure 8.10 The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire ). Unrelated diversification occurs when an organization attempts to diversify into the industries and businesses that hold the promise of the most financial gain for an organization. It is now one of the biggest and most valuable brands in the world and, although all their products are developed in-house and have a distinctive style, Apple has acquired dozens of smaller firms (such as PA Semi and Intrinsity (for smartphone SOC chips), Polar Rose, FingerWorks, and IMSense (for the iOS software ecosystem), and Poly9 and Coherent Navigation (for Apple Maps)) to improve their products. Virgin expanded from a record label to transport and healthcare, while Disney’s operations range from film studios to entertainment parks. The company also targets lower-end consumers, too. In association with. Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification. Keen to modernise their traditionally hand-drawn animation, the company – rather than start from scratch – acquired a smaller competitor with the requisite levels of experience and expertise already in place. It also sells fruit juices (Minute Maid), energy drinks (Powerade), mineral water (Glaceau), and coffee (Costa Coffee), while it even made an eventful foray into the wine market in the 1980s. It might seem hard to distinguish the difference between a bank and a financial services brokerage firm these days. Training at a facility that focuses on rehabilitation and healthy workouts may give the business an edge against its competitors. Examples of Business Diversification. Finding a strategic fit is less important here than generating profit. Understanding Diversification. The Bentley marque was also acquired over a series of deals in the 1990s and 2000s, while Bugatti and Lamborghini were acquired in 1998, giving the company a huge presence in the luxury car segment. Companies’ implements related diversification strategies in order to achieve and exploit economies of scope and build a competitive advantage by building on existing resources, capabilities, and core competencies. occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or business lines (Figure 8.11 “The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire”). As an example, an automotive dealership that purchases a detailing company (cleans, washes, polishes vehicles – both inside and outside) features involved with related diversification. In addition to achieving higher profitability, there are several reasons for a company to diversify. Related diversification can sometimes provide economies of scale. This is a horizontal diversification model, introducing unrelated products to the same customer base. These ways are (a) related- constrained, and (b) related-linked. Although Honda is best known for its cars and trucks, the company actually started out in the motorcycle business. Many major banks have merged with major financial services firms. These are still the same meals. The goal of such diversification is to achieve strategic fit. The acquisition of Pixar is a particularly good example of Disney's approach. This is called a concentric diversification model where they are similar products. Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries. Market diversification means extending your business offering to new market segments not previously targeted. Philips. Related. Revenues per sale go up and those who might forgo coffee to get the sandwich might be more inclined to get both from Starbucks. A business diversifies by offering assorted goods and services, participating in new industries, or finding multiple uses for its products. It involves adding new products to your portfolio for markets that are similar or related to your existing customer base, with the ultimate aim of making your business bigger, increasing revenues and, above all, creating a more versatile, resilient, and future proof organisation. Some firms that engage in related diversification aim to develop and exploit a core competency to become … Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries (Figure 8.1). When not writing, Kimberlee enjoys chasing waterfalls with her son in Hawaii. The benefit of this related method is it gives simpler expansion: you already … In an attempt to expand their market size and invigorate their brand, many firms take a shot at diversifying their brand. Their acquisitions of Marvel and LucasFilm, meanwhile, has given them ownership over the merchandising and image rights of some of the world's most iconic media brands, while its ownership of 21st Century Fox has provided a huge catalogue of movies and television shows for the Disney+ digital streaming service – a key competitor to established giants such as Netflix, Amazon Prime, and Apple TV. With revenues of more than $122 billion in 2017, it’s one of the largest companies in the world and one of the most diversified. Consumers spend a lot of time and money trying to stay in shape, get healthy and recover from injuries. The reason is banks have housed brokerage subsidiaries for a couple of decades now realizing that the ability to offer one-stop-shopping for all things money and investing is attractive to consumers. It now employs 706,000 people across a variety of sectors such as chemicals, steel, automotive, engineering, telecommunications, information systems, and … With the rise of digital music downloads, the iPod was also a success upon its release in 2001, but their biggest success in product diversification was undoubtedly the launch of the first iPhone in 2007. In the budget market for passenger cars, Volkswagen sells its own eponymous brand, as well as cars produced by SEAT and Skoda. A core competency is a skill se… With over 25 different brands in skincare, cosmetics, makeup, and haircare, Estée Lauder has shown that diversification into related markets – whether through acquisition or in-house production – is the key to growth. For example, if the shoe producer enters the business of clothing manufacturing. If done correctly, Related diversification is when a company operates several businesses that are linked together in some way or has several related product lines. Related diversification makes more sense than unrelated because the company shares assets, skills, or capabilities. They also acquired Scania AB and MAN SE to improve its commercial vehicle business, as well as venturing into the sports car market through the purchase of Porsche (2009), and the motorcycle market with Ducati (2012). With more than 15 years of small business ownership including owning a State Farm agency in Southern California, Kimberlee understands the needs of business owners first hand. These include jet engines and replacement parts; rail system products and maintenance services; power plant products andservices;gas,steamandaero turbines;advancedturbinemachinery;majorappliances such as Under the guidance of Steve Jobs, however, the company's fortunes changed drastically, with the groundbreaking launch of the iMac and iBook series in 1997. Unrelated Diversification is a form of diversification when the business adds new or unrelated product lines and penetrates new markets. Or if you’re with Spring-Green Lawn Care, you might consider adding Let us know your thoughts in the comment section below! Or, you could acquire other businesses who already have these capabilities. 1.1 Actual diversification development over the last decades 1.2 Diversification and company performance: results of empirical studies 2. Some firms that engage in related diversification aim to develop and exploit a core competency to beco… Examples of Horizontal Diversification. It wasn't until it diversified horizontally into related markets that the company started to see real growth, launching the Aramis men's fragrance in the 1960s. Honda Motor Company provides a good example of leveraging a core competency through related diversification. Once upon a time, you would see a very distinct difference between a physical therapy office helping patients recover from injury and a massage therapy office focusing on relaxation and preventative care. Indeed, this is one of the benefits of horizontal diversification; there is more than one way in which you can make it work for your particular venture. Over the years, however, the company has made a spate of acquisitions in the automotive business, acquiring other car brands and marques to cater to a wide range of customers. A bad reputation Everyone knows how huge General Electric, or GE, is but may not realize how highly diversified it is as well, with operation in many areas. Founded 1891. 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