Diversification Strategy (With Real World Examples) | From A Business Professor

Summary

In this video, we explore the concept of diversification as a business strategy, using examples from companies like 3M and Samsung. Diversification allows firms to expand market share, mitigate risks, defend against competition, and increase profits. The video discusses three main types of diversification strategies: related diversification, where businesses expand into similar industries; unrelated diversification, where companies venture into completely different markets; and geographic diversification, which focuses on expanding into new regions. The video emphasizes that related diversification, often leveraging a company's core competencies, tends to have the highest success rate.

Takeaways

• 😀 Diversification is a strategy used by companies to expand market share or enter new markets by launching or acquiring new products.
• 😀 Companies implement diversification to mitigate risks, defend against competition, and increase profits.
• 😀 Risk mitigation is a key reason for diversification, allowing companies to spread investments across multiple products and channels.
• 😀 Competitive defense through diversification helps companies address underserved markets before competitors can enter.
• 😀 Expanding product offerings, like adding food options to coffee shops, is a common way businesses diversify to increase profits.
• 😀 Related diversification involves entering new industries that have similarities with existing ones, allowing businesses to leverage core competencies.
• 😀 An example of related diversification is Disney's acquisition of ABC, as both are in the entertainment sector.
• 😀 Unrelated diversification occurs when companies expand into industries with no direct connection to their existing business, though it often leads to failure.
• 😀 Geographic diversification helps companies expand into new regions, with big-box stores like Target and Best Buy using this strategy successfully.
• 😀 Companies can achieve synergies in geographic diversification through streamlined administrative functions and standardized processes for new store development.
• 😀 Research shows that related diversification has a higher chance of success compared to unrelated diversification because it builds on existing strengths and brand reputation.

Q & A

What is diversification in business strategy?

Diversification is a strategy that companies use to expand market share or enter new markets by launching or acquiring new products. It helps a company grow by either increasing market share in existing markets or by establishing a presence in new markets.

What are the three main reasons companies implement a diversification strategy?

The three main reasons for diversification are: 1) Mitigating risk by spreading investments across different products or markets, 2) Competitive defense by filling market gaps before competitors can, and 3) Increasing profits by offering complementary products or services.

What is related diversification, and can you give an example?

Related diversification occurs when a company moves into a new industry that has similarities with its current industry. An example is Disney's acquisition of ABC, as both are part of the entertainment sector, allowing Disney to leverage its expertise in media and entertainment.

How does a company benefit from related diversification?

Companies benefit from related diversification by leveraging core competencies, which are skills that are difficult for competitors to imitate. This can lead to better brand synergy, operational efficiency, and a stronger market position in the new industry.

What is unrelated diversification, and why is it often risky?

Unrelated diversification occurs when a company expands into industries that are unrelated to its current operations. This strategy is risky because it lacks synergy, and the company may struggle to apply its existing skills and resources to the new industry, as seen with Harley Davidson's failed attempt to sell bottled water.

Can you explain geographic diversification with examples?

Geographic diversification refers to a company expanding into new geographical regions, either domestically or internationally. For example, Starbucks has successfully expanded worldwide, and KFC has expanded its presence across many countries, helping to reduce business risk and tap into new customer bases.

Why do companies diversify during market volatility or downturns?

During times of market volatility or downturns, companies diversify to spread their investments across different markets and product lines. This reduces the impact of losses in one area, ensuring that the overall business remains stable despite fluctuations in any single market.

How does diversification help companies defend against competition?

Diversification helps companies defend against competition by enabling them to enter underserved markets or cater to unmet customer needs. By doing so, they can establish themselves in these areas before competitors have a chance to exploit the gaps.

What are some examples of companies that failed due to poor diversification?

Harley Davidson's attempt to sell bottled water and Starbucks' failure to offer branded furniture are examples of poor diversification. Both companies tried to expand into markets unrelated to their core business, which did not resonate with customers and ultimately led to failure.

Why is related diversification considered more successful than unrelated diversification?

Related diversification is generally considered more successful because it allows companies to build on their existing capabilities, skills, and brand image. This synergy helps companies better serve their customers and make a smoother transition into new industries compared to unrelated diversification, which often lacks such advantages.