Related and unrelated diversification

Summary

The video explores the concept of related versus unrelated diversification in business. It explains how companies diversify by leveraging shared resources such as knowledge, expertise, equipment, and customer bases. Using examples like Nike, Tesla, and Alibaba, the video illustrates how some businesses expand into related sectors, while others venture into entirely unrelated industries. It emphasizes that understanding the resources and capabilities being shared is crucial to maintaining competitive advantages. The key takeaway is recognizing the balance between utilizing existing assets and entering new markets strategically.

Takeaways

• 🔄 Diversification can be related or unrelated, ranging from highly similar to vastly different businesses.
• 🧠 Related diversification often shares the same knowledge, expertise, equipment, and customers across different business ventures.
• 🏃‍♂️ Nike's expansion into basketball shoes and apparel used the same brand, customers, and distribution channels but varied in knowledge and processes.
• 📱 Nike's venture into fitness monitors involves new expertise, distribution, and business models compared to their traditional markets.
• 🍕 The hypothetical example of Nike entering the pizza business illustrates unrelated diversification with no shared resources or expertise.
• 🚗 Tesla's diversification into electric cars, batteries, and solar panels shows how some resources, like branding and expertise, are shared, while other areas differ.
• 🛒 Alibaba's diversification from B2B (Alibaba) to C2C (Taobao) and later into financial services (Alipay) involved leveraging similar expertise, processes, and business models.
• 📦 Alibaba’s logistics network, Cainiao, reflects a high degree of shared expertise with its e-commerce platform, despite being a separate business.
• ⚙️ The success of diversified firms depends on how well resources like expertise, processes, and business models are shared across businesses.
• 🔑 Key resources such as Tesla’s brand and electric car expertise, Nike’s distribution, and Alibaba’s platform knowledge drive competitive advantage in diversified ventures.

Q & A

What is diversification in the context of business strategy?

Diversification in business strategy refers to expanding a company's operations into different areas. This can range from highly related diversification, where new activities align closely with the existing business, to highly unrelated diversification, where there is no obvious relationship between the new and existing operations.

How does Nike demonstrate related diversification?

Nike shows related diversification by expanding from premium mass-market running shoes into premium mass-market basketball shoes. Both products are sold through the same retailers, using the same brand, equipment, customers, and business model, leveraging shared expertise and resources.

What is an example of unrelated diversification?

An example of unrelated diversification is Nike hypothetically opening an affordable pizza store called 'Za2Go.' This would use different knowledge, a new brand, different equipment, and target new customers with a different business model.

How does Tesla’s diversification strategy involve both related and unrelated aspects?

Tesla’s diversification involves related aspects like using the same brand and leveraging electric car expertise across models. However, Tesla also ventured into residential batteries and solar roofing panels, which, while connected by the use of electricity, require different expertise, equipment, processes, and distribution channels.

What role does brand consistency play in diversification strategies?

Brand consistency plays a critical role in related diversification, as seen with Nike and Tesla. Maintaining the same brand helps leverage consumer trust and recognition, allowing companies to use existing brand equity to enter new but related markets.

How did Alibaba diversify its business over time?

Alibaba began as a B2B platform connecting businesses and expanded into C2C sales with Taobao, leveraging the same expertise, processes, and business model. It further diversified into mobile payments (Alipay) and logistics (Cainiao), sharing expertise while developing new capabilities for specific industries.

What are the key factors to consider when classifying diversification as related or unrelated?

Key factors include the knowledge and expertise required, equipment and processes used, target customers and distribution channels, geographic focus, shared brands, and similarities in business models.

How does geographic focus affect related diversification?

Geographic focus affects related diversification by allowing companies to leverage existing distribution channels and customer bases. For example, if a business expands into a different product but sells to the same region or customers, it’s likely considered related diversification.

What makes Tesla’s vertical integration strategy distinctive?

Tesla’s vertical integration is distinctive because it connects solar panels (energy production), batteries (energy storage), and electric cars (energy usage). While they share some aspects like branding and customer base, each requires unique expertise and processes.

What is the main advantage Alibaba gained from its platform-based diversification?

Alibaba’s main advantage from platform-based diversification is the ability to leverage data about its customers and suppliers, optimizing logistics and sales strategies across its various businesses, which helped create a highly efficient ecosystem.

Outlines

00:00

🤔 Understanding Related and Unrelated Diversification

This section introduces the concept of diversification, explaining that it can range from highly related to highly unrelated. Related diversification involves businesses that share expertise, equipment, customers, or business models, while unrelated diversification lacks these commonalities. It offers a framework to assess relatedness by considering knowledge, processes, customers, geography, brand, and business models. The examples given highlight varying degrees of relatedness, such as Nike's expansions in footwear, apparel, and fitness monitors, showing how different businesses can leverage the same brand but may differ in other aspects.

05:02

🚗 Tesla's Diversification Strategies

This part uses Tesla as a case study to demonstrate related diversification. Tesla started with electric cars and then expanded into residential batteries and solar roofing panels. All businesses share the Tesla brand, and some share underlying expertise, equipment, and processes. However, new ventures like solar panels required different knowledge and processes. Tesla's product expansion shows how businesses can diversify while maintaining brand consistency and leveraging some shared resources across product lines.

💼 Alibaba's Platform-Based Diversification

This section discusses Alibaba’s diversification, highlighting how the company expanded from its original B2B platform into C2C, B2C, mobile payments, and logistics. Although these ventures involve different brands and customers, they share Alibaba's platform expertise, processes, and business model. For example, Taobao and T-Mall leverage the same platform capabilities as the original Alibaba marketplace, and its logistics network uses data from the platforms to coordinate supply chain efficiency. The example demonstrates how leveraging a core capability, like platform expertise, can enable diversification across different industries while maintaining operational coherence.

🧠 The Importance of Shared Resources in Diversification

This conclusion emphasizes the importance of understanding what resources are shared and how crucial they are to competitive advantage in diversification strategies. It compares the key resources for Tesla (electric car expertise and brand), Nike (strong brand and distribution), and Alibaba (platform expertise and data-driven efficiency). The section suggests that firms should focus on identifying and maximizing the competitive advantage derived from shared resources when diversifying into new areas.

Keywords

💡Related diversification

Related diversification refers to expanding a company's operations into new areas that have significant commonalities with its existing business. In the video, Nike’s move from premium mass-market running shoes to basketball shoes is an example. The expansion leveraged the same brand, expertise, and processes, showing how related diversification builds on existing capabilities.

💡Unrelated diversification

Unrelated diversification involves a company entering an industry or market with little to no overlap with its current operations. The video provides a humorous hypothetical example of Nike opening a pizza store in Beaverton, Oregon, illustrating that such an expansion would require entirely different expertise, brands, and business models, with little shared between the two businesses.

💡Brand leverage

Brand leverage refers to using an established brand's reputation to promote new products or services in related or unrelated fields. Nike's brand, synonymous with athletic achievement, was leveraged when it expanded into apparel and fitness monitors. This is a key concept in related diversification, where the brand can be a powerful tool across different but complementary product lines.

💡Business model

A business model describes how a company creates and delivers value, and generates revenue. The video contrasts different business models used by companies like Tesla and Alibaba. For example, Tesla's car sales model differs from the subscription-based model for fitness monitors, showing how diversification can involve changes in how a company operates and makes money.

💡Distribution channels

Distribution channels refer to the means through which a company delivers products or services to customers. In related diversification, companies may use the same channels, as seen with Nike’s footwear and apparel being sold through the same retailers. However, in unrelated diversification, such as the move into fitness monitors sold through electronics stores, distribution channels differ.

💡Knowledge and expertise

Knowledge and expertise are crucial resources in determining whether diversification is related or unrelated. Related diversification, like Nike moving from shoes to apparel, may use shared expertise, while unrelated diversification, such as Alibaba moving into financial services, requires new knowledge and capabilities, as financial expertise differs significantly from platform management.

💡Processes and equipment

Processes and equipment are the operational systems and tools a company uses. Related diversification allows companies to share processes and equipment across business lines, as seen with Tesla’s luxury and near-luxury cars sharing production processes. Unrelated diversification requires different processes, as with Nike’s hypothetical entry into the pizza business, which would demand new equipment.

💡Tesla’s diversification

Tesla’s diversification journey includes moving from luxury electric cars to near-luxury models, residential batteries, and solar roofing panels. While all these businesses share the Tesla brand and some expertise, they also involve different processes, distribution channels, and business models. This illustrates both related and somewhat unrelated diversification within the same company.

💡Alibaba’s platform expertise

Alibaba’s platform expertise refers to its ability to create and manage online platforms connecting buyers and sellers. This expertise was central to its business-to-business (B2B) operations and later leveraged for consumer-to-consumer (C2C) and business-to-consumer (B2C) models. Alibaba’s diversification into logistics and payments still used this core platform expertise, though applied in new ways.

💡Competitive advantage

Competitive advantage is the unique benefit a company has over its competitors. In diversification, the ability to leverage core strengths, such as Tesla’s expertise in electric vehicles or Alibaba’s mastery of platform management, is crucial. Related diversification helps firms build on their competitive advantage, whereas unrelated diversification may challenge their ability to maintain it.

Highlights

Diversification can range from highly related, such as expanding in the same business, to highly unrelated, where there is no clear connection between businesses.

Related diversification can be classified based on categories like shared knowledge, equipment, processes, customers, geographic area, and business models.

Nike's expansion into basketball shoes was highly related to its existing business, leveraging the same knowledge, equipment, brand, and customers.

Nike's entry into sports apparel shared the same brand and customer base but used different knowledge and processes compared to its shoe business.

Nike's hypothetical expansion into fitness monitors involves a more unrelated diversification, using a different business model and distribution channel.

Tesla's diversification from premium electric sports cars to near-luxury models still leverages shared expertise, equipment, and processes across its vehicle range.

Tesla's move into residential batteries and solar panels represents a related diversification through its electric expertise but involves different business models and distribution channels.

Alibaba’s initial focus was business-to-business (B2B), where the platform connected businesses without holding inventory and charged commissions.

Alibaba expanded into consumer-to-consumer (C2C) with Taobao, using the same platform expertise but targeting different customers with a similar business model.

Alibaba's creation of Alipay was a further related diversification, using similar processes and serving some of the same customers, but requiring financial expertise.

Taobao Mall (later T-Mall) is Alibaba’s business-to-consumer (B2C) platform, leveraging its platform expertise while serving new customer segments.

Alibaba's logistics network, Cainiao, coordinates warehouses and delivery partners without owning the physical assets, leveraging its platform data and processes for efficiency.

Tesla’s expertise in electric vehicles and branding were key resources in its related diversification across its product line.

Nike’s powerful brand and deep reach into its distribution channels were crucial resources that allowed its related diversification into new sports product categories.

Alibaba's platform expertise, including the use of data to optimize efficiency, has been one of its most important resources, driving its various diversification strategies.

Transcripts

hi everyone let's talk about related

versus unrelated diversification

diversification can range from highly

related such as when you have more in

the exact same kind of business to

highly unrelated such as when there's no

obvious relationship between the

businesses so let's look at some of the

ways that diversification can be related

and unrelated first let's think of some

categories along which we could classify

something as related does it use the

same knowledge and expertise can we use

the same equipment and processes are we

selling to the same customers or

distribution Channel we already sell to

are we selling into the same or

different geographic area can we use the

same Brands across the businesses are

the business models of the businesses

highly similar or different or is Cash

really the only thing that the

businesses share let's look at a few

examples starting with highly related

diversification when Nike expanded from

premium mass-market running shoots into

premium mass-market basketball shoes

sold through the same retailers it

already uses this leveraged the same

knowledge and expertise the same brand

the same equipment and processes the

same customers and geography and the

same business model

when Nike expanded into premium Mass

Market apparel and other sports gears

sold through the same retailers it was

already using this used different

knowledge and expertise but the same

brand it used different equipment and

processes though probably still some

shared Logistics and it was selling into

the same customers and geography using

the same business model

now suppose Nike expands into premium

Mass Market Fitness monitors sold

through electronics stores with a

subscription service

this uses a different knowledge and

expertise base it's leveraging the same

brand but it's using different equipment

and processes there's some overlap in

the end consumers but it's a different

Direct customer that is electronic

stores versus sport shoes and equipment

stores and it's using a different

business model because it's now making

money off a subscription service now

suppose Nike begins opening an

affordable pizza store called za2go only

in its hometown of Beaverton Oregon

this utilizes a different knowledge and

expertise base a different brand

different equipment and processes

selling to different customers using a

different business model okay I just

made this one up to make a point so now

let's look at different recent

diversification moves and think about

how they were related and unrelated

let's take Tesla Tesla started out in

the business of making a super premium

electric sports car called The Roadster

which was sold directly to customers on

a wait list and then personally

delivered it then expanded into the

luxury electric cars Model S and model X

sold through its own network of

dealerships and then into the near

luxury model 3 and model y also sold

through its own network of dealerships

and then into residential batteries sold

direct and solar roofing panels also

sold direct all of the businesses share

the same Tesla brand all of the electric

car businesses share some underlying

expertise equipment and processes the

Model S model X model 3 and model y

share a distribution model and the model

X and Model S also share a positioning

strategy luxury as do the model Y and

model 3 which have the positioning

strategy of near luxury it's easy for us

to see the vertical relationships

between solar roofing panels to make

electricity and batteries to store

electricity to electric cars which use

electricity but these businesses require

fundamentally different expertise

equipment and processes and distribution

channels let's do another one in 1999

Jack Ma and his friends founded Alibaba

a platform that helps businesses find

and buy goods from other businesses that

is business to business or B to B

Alibaba did not take ownership over any

of the goods it just helped buyers and

sellers find each other and charged a

commission on sales and it also sold

advertising on the site it later created

a new platform called taobao that

offered consumer to consumer that is C2C

sales with the same basic business model

and Technology don't hold inventory make

it easy for sellers to create listings

and guide buyers to find the products

they want while charging commissions and

selling advertising it was a different

brand and served different customers but

it was based on the same basic expertise

equipment and processes and business

model later Alibaba would create alipe a

mobile payments platform that partially

leverages the same brand serves many of

the same customers and has a similar

business model it uses some of the same

platform management processes though it

also required some different AKA

Financial expertise

Alibaba also created a business to

Consumer that's b2c platform called

taobao mall later called t-mall that

again leveraged the same platform

expertise and resources it had honed

with Alibaba and taobao then Alibaba

created Sino a logistics Network that

links warehouses distribution centers

and delivery companies mirroring

alibaba's strategy for e-commerce sign

out owns no warehouses and employs no

delivery Personnel instead it just

coordinates them efficiently enabling

participants to confidentially exchange

information provide real-time status on

deliveries and more signow leverages

alibaba's platform expertise much of the

same expertise and processes of its

platform businesses and serves the same

customers and suppliers it had worked

with in its other businesses

data on these suppliers and customers

was now one of alibaba's Key Resources

it knew what sellers were selling what

buyers were buying and it was extremely

well positioned to design an efficient

Logistics system to meet their needs

thus even though most of alibaba's

different businesses have different

brands and they serve a range of

customers they also have a high degree

of sharing of expertise equipment and

processes and business model

so to sum it up businesses and

activities in a firm can be related in

different ways some of which are more

important than others it is useful to

think about what resources are being

shared and what resources aren't and how

crucial those resources are to

competitive Advantage for Tesla having

electric car expertise and a compelling

brand was very important for Nike a

brand synonymous with athletic

achievement and Deep Reach into its

distribution channels that is its

customers was very important for Alibaba

its expertise in creating platforms to

connect buyers and sellers while using

the data to optimize efficiency was its

most important resource