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.