The goal of diversification is often to reduce the overall risk of the business and to generate new sources of revenue. A good diversification strategy can kick-start a struggling business. It can also extend the success of already profitable companies. There are four key reasons why businesses adopt a diversification strategy: Diversification is important because it helps a business spread its risk across different areas, reducing dependency on a single market or product. It can also lead to increased revenue streams and improved long-term sustainability. Let's look at some of the best examples of business diversification strategies in action. One of the most famous companies in the world, Apple Inc. is one of the greatest examples of a “related diversification” model. Related diversification means there are commonalities between existing products/services and new ones in development. Once upon a time (1984), Apple launched the Macintosh personal computer. They had released products before this, like the Apple I motherboard, but the Macintosh defined Apple’s early success. A period of decline hit the company during the mid-1990s. Microsoft had been delivering a cheaper and simpler (albeit less powerful) PC alternative. Towards the end of the 1990s, Apple was approaching bankruptcy. Then it all changed. In 2001, Apple launched the iPod and iTunes software (2003). This was a success. Apple would hit the diversification jackpot a few years later with the iPhone in 2007. It’s easy to forget that computers and mobile phones bore next to no similarities from a consumer perspective before the smartphone. Operational synergies let Apple share resources and capabilities between the two product groups. The iPhone used many of the same resources and design principles as Apple's computers. Apple didn’t stop there, though. The company has since diversified into tablets, watches, smart-audio, and even electric vehicles. Diversification strategy saved Apple from failure, and helped them grow into one of the world's biggest corporations. Amazon is one of the world’s largest and most well-known companies. They generated a mouth-watering $386 billion in 2020. Amazon was originally an online bookseller, and it was a very successful one after its launch in 1995. Books were easy to source and distribute but Jeff Bezos planned to diversify. Amazon began selling video games and other multimedia in 1998. Before long, the company sold consumer electronics, software, homeware, toys and more. The goal of Amazon was always to diversify from an ecommerce website to a fully loaded tech giant. Amazon later launched AWS (Amazon Web Services). AWS delivers on-demand cloud computing platforms and APIs. They were now a long way away from just selling books. Amazon diversified further as they launched the Kindle e-reader and later the Amazon Echo smart speaker system. This is a very similar trajectory to what Apple had followed before. They also entered the digital music industry with Amazon Music. Skip ahead to the present day, and Amazon has its own airline (Amazon Air), cloud storage platform, movie studio, and much more. The diversification of Amazon is as impressive as it is worrying for competitors. It is the highest profile example of strategic relatedness in business diversification. Diversification can be a good idea for a business in several situations: Therefore, it's important for a business to carefully consider the costs and benefits of diversification before making a decision. Better still, download our free diversification toolkit to see if it's the right move for you. Risks of diversification include resource allocation challenges, cultural clashes in case of mergers or acquisitions, and the possibility of spreading a company too thin. Poorly executed diversification can lead to failure in new markets. There are countless other issues that can arise, and even some of the world's largest companies have gotten it wrong. Harley Davidson, famous for its iconic motorcycles, diversified into fragrances in the 1990s. A notable example of over-extending a brand, this perfume angered the Harley Davidson fanbase. The failed launch prompted more careful diversification strategy from the company thereafter. The lesson: Be careful of brand clashes when diversifying. Virgin, which began selling records, is another example of long-term diversification strategy. Virgin Media, Virgin Holidays and Virgin Money have all seen considerable success. But even the best occasionally gets it wrong. That is exactly what happened when Virgin decided to take on Coca Cola and Pepsi with Virgin Cola. Virgin Cola only managed a market share of 3% in the UK. Because of the size of the Virgin Group, they were able to survive and move on from this failure. Smaller corporations may not have done. The lesson: Be realistic about your product’s appeal alongside the competition. Google is a behemoth of a corporation, with near limitless budget, resources, and know-how. Even they can get diversification wrong. This is exactly what happened with their 2013 foray into wearable hardware, called Google Glass. Google heralded the device as a wearable, user friendly, non-intrusive alternative to a smart-phone. But the product was discontinued after just 2 years. The release was hit by complaints about poor battery, privacy concerns, bugs and even a ban from use in public spaces. The lesson: Make sure your product is fit for purpose and has legitimate appeal. Here are some examples of business diversification strategies: Management accounts can aid diversification by providing valuable insights into a company's financial performance and position, which can help management make informed decisions about diversification opportunities. Here are a few ways in which management accounts can aid diversification: The choice of diversification strategy depends on factors such as the company's core competencies, market trends, and risk tolerance. Conducting a thorough market analysis and evaluating internal capabilities can help in making informed decisions. Yes, small businesses can benefit from diversification. It may involve expanding product lines, entering new markets, or developing complementary services to mitigate risks and foster growth. A company should regularly review its diversification strategy, especially in dynamic markets. Annual reviews, performance evaluations, and continuous monitoring of industry trends can help ensure the strategy remains aligned with business goals. Successful diversification can positively impact financial performance by providing additional revenue streams. However, it may also involve initial investment costs, and the returns may take time to materialise. Yes, technological advancements can prompt diversification as companies seek to leverage new technologies or adapt their products and services to stay competitive in the rapidly evolving digital landscape. Diversification can be challenging for both established companies and start-ups. Established companies may face resistance to change, while start-ups might encounter resource constraints. However, both can benefit from strategic diversification. Diversification can lead to a dilution of brand identity if not managed carefully. Companies must ensure that new products or services align with the core values and image of the brand to maintain customer trust. Signs that it may be time to diversify include stagnating growth, increased competition, changing consumer preferences, or a reliance on a single product or market. Monitoring these indicators can help a company proactively consider diversification strategies. If you would like to discuss your diversification objectives with the Genus team, get in touch today.Business diversification refers to the strategic expansion of a company into new products, services, or markets to reduce risk, capture new opportunities, and enhance overall business resilience.
Why is diversification important in business?
Examples of Diversification: Apple
Examples of Diversification: Amazon
When is diversification a good idea?
When is diversification not a good idea?
Harley Davidson’s “Legendary Eau de Toilette”
Virgin Cola
Google Glass
Types of business diversification
How management accounts can benefit diversification strategy
Business Diversification FAQs
How can a company decide on the right diversification strategy?
Can small businesses benefit from diversification?
How often should a company review its diversification strategy?
How does business diversification impact financial performance?
Can diversification be a response to technological advancements?
Is diversification more challenging for established companies compared to start-ups?
Can diversification lead to a dilution of the company's brand identity?
What are the signs you should diversify?
Related articles
Alicia Williams
Alicia is Director of the Genus team at Shorts, a chartered certified accountant and Xero specialist.
View my articles
Tags: GENUS Management Accounts
