Related and unrelated diversification
Summary
TLDRThe 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
🤔 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.
🚗 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.
Mindmap
Keywords
💡Related diversification
💡Unrelated diversification
💡Brand leverage
💡Business model
💡Distribution channels
💡Knowledge and expertise
💡Processes and equipment
💡Tesla’s diversification
💡Alibaba’s platform expertise
💡Competitive advantage
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
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