Nowadays Product Diversification is a mandatory process in Indian

Industry. Give an example for success and failure. Give reasons

for the success and failure

Diversification: Definition, Levels, Strategy,

Risks, Examples
Generally, diversification means expansion of business either through operating in multiple
industries simultaneously (product diversification) or entering into multiple geographic
markets (geographic market diversification) or starting a new business in the same industry.

At the business-unit level, diversification occurs when a business unit expands into a
new segment of the present industry in which the company is -already doing
business.

At the corporate-level, diversification occurs when the diversified company enters

into business outside the scope of. the existing business units. Diversification is
sought to increase profitability through greater sales volume.

The popular forms of diversification are vertical integration/ horizontal

diversification; and geographic diversification.

Vertical integration involves integrating business along with the company’s value:
chain, either backward or forward. Horizontal diversification involves moving into new
businesses at the same stage of production as the company’s current operations.

Geographic diversification involves moving into new geographic areas.

The three forms of diversification may be related (adding or expanding existing

product lines or markets) or unrelated (adding new or? ‘unrelated’ product lines or
markets, i.e. entering into a business in ‘ a different industry).

Levels of Diversification
Some management experts have tried to show that diversified firms? vary according
to their levels of diversification.

According to them, three levels of diversification exist;

A. Low Levels of Diversification.

B. Moderate to High Levels of Diversification.

C. Moderate to High Levels of Diversification.

Low Levels of Diversification
This level of diversification is seen in a company that operates its activities mainly on
a single or dominant business. The company is in a single business if its revenue is
greater than 95 percent of the total sales.

If the generated revenue is between 70 percent and 95 percent, the company’s

business is dominant. 5M Security Services Limited is an example of a firm with little
diversification as its primary focus is on the ‘security guards market’.

Kellog is an example of a dominant business firm because its major sales come from
breakfast cereals’ and ‘snack foods’.

However, the firms that generate their income from single products cannot be called
diversified firms in the true sense of the term.

Moderate to High Levels of Diversification

In this level, two types of diversification are evident – ‘related constrained’ and
‘related linked’, in the case of related constrained diversification, less than 70 percent
of revenue comes from the dominant business and ail SBUs/divisions share product,
technology, and distribution channels.

If the firm has related linked diversification, less than 70 percent of revenues come
from the dominant business but there are only limited links between and among the
SBUs. Procter and Gamble is an example of a related constrained firm, while
Johnson and Johnson is an example of a related linked firm.

Very High Level of Diversification

This level applies to companies that have unrelated diversification. It earns less than
70 percent of its revenues from the dominant business but there are no common
links between the SBUs.

Diversification strategy
In the history of man-made institutions, universities are the only organizations that
have survived through the same product-knowledge for more than 11 centuries!

However the content packaging and delivery of knowledge have changed immensely
and not all universities have survived.

This exception only proves the rule that organizations have to develop new business
as they grow even unrelated businesses. Another pathway to growth is to venture
away from the known turf.

The premise of diversification is to explore attractive business opportunity areas

unrelated to the present business. Ponder an analogy here. As an individual
investor, you are advised to spread your risk.
Why? Because a diversified portfolio insulates you from risk more than a single
product investment portfolio does.

Similarly, an organization cannot expect the conditions in which it may have done
good business to last forever. It spreads its risks by venturing into new and different
areas of business with better prospects.

When an organization moves away from its known and tested product-market
technology sphere to offer new products (related/unrelated) or enter new markets
(related/unrelated) using new/modified/allied technology it is said to be following the
diversification pathway.

Diversification is endemic in the corporate world; almost all the fortune 1,000
organizations are diversified. You will observe that most family-held businesses are
also highly diversified.

The diversification is an attractive option to meet the growing aspirations of an

increasing number of family members. The relentless pursuit of diversification as a
strategy has given way to reasoned diversification.

Instead of many businesses in unrelated areas, it makes sense to have a portfolio of

related or aligned businesses. The logic is that such diversification allows an
organization to harness linkages to create a competitive advantage.

Still, the diversification patterns in the Asian countries suggest unrelated

diversification to be common among larger business groups.

Organizations diversify to:

▪ Circumvent government policy restrictions on growth as was the case with pre-
liberalisation caps on capacity expansion in India. These led Indian companies to
diversify in many unrelated areas.

▪ New technologies/substitute products may have made existing domain unprofitable or

likely to be so. Diversification may offer better opportunities.

▪ Utilize fully the depth and breadth of managerial skills and competencies.

▪ Utilize surplus or retained cash for a higher rate of return.

▪ To enter a hitherto virgin area of immense potential. For example, in India, the
privatization of higher education has attracted many players from fields as diverse as
steel manufacturing to foods business to set up broad-based and specialty universities.

▪ Information asymmetry in the existing business may be too high to permit new plans.

▪ Spread Risk. In a diversified, portfolio risk is distributed among multiple businesses.

▪ Leverage the commonality among businesses. This leveraging creates economic

benefits.
Diversification risks
Diversification is an interesting but complicated strategy.

First, the skills needed to run the diversified entity may be different and at variance
with the parent entity Diversification poses a challenge to the managerial
skills/aspirations of managers.

It provides an opportunity to exhibit personal mettle at the same time as it requires

managers to be open to learning and quick at adaptation.

The common thread running through such diverse business is the ethical and
governance standards of the corporate parent. Diversification is risky.

It entails decision risk (choice and means of diversification may be

wrong), implementation risk (structure, processes, systems, leadership, talent may
be inadequate) and financial risk (the return to stockholders may be considerably
reduced.)

Diversification pathways
Diversification is an investment-intensive option and an organization can diversify
through different pathways. The different pathways have different levels of risk and
resource requirements

Table below explains; higher the relatedness in domain of products, customer

segments, technology, transference of management skills in diversification, lower is
the risk from diversification, (this does not preclude the risk of the wrong strategic
choice) and lower the relatedness, the higher is the risk from diversification (this
does not take in to account the depth of the managerial skills that can steer
diversification.).

There are four broad routes to diversification concentric, horizontal, vertical and
conglomerate. The salient features of each of these are discussed below;

Features Examples

Horizontal Entertainment industry.

diversification.
Film production houses
The organization takes also distribute movies
over those organizations through DTH networks.
which manufacture the
same/ similar product or Walt Disney( movies and
marketing functions. distribution)
Increase in size expected
to infuse economies of
scale and scope. An
expected increase in
market share.

Vertical integration. Cement, steel and textile

companies are vertically
The organization takes diversified. In India,
overproduction of raw cement manufacturers
material, (backward) have captive power
intermediary or key generation plants.
process (forward) to
realize cost advantage. Excess power is sold to
either state-run utilities or
Lower costs lead to lower other industries.
prices which leads to
higher market share. Soap/detergent
manufacturer setting up
Reduces flexibility. linear alkylbenzene (LAB
Extensive barriers that a key ingredient for soaps)
may limit to one industry plant for supply-side
are created. advantage.

Concentric Pharmaceutical
diversification. companies’ product range
includes Prescription
Diversification into broadly drugs, nonprescription
related areas (product- drugs, drug delivery
market/ technology). systems, eye, and
skincare products.
The market is regarded as
a domain of related but There is s difference
heterogeneous needs that between the products and
an organization can meet technology but a broad
with heterogeneous but marketing scope enables
allied offerings. to leverage of brand value.

Conglomerate
diversification.
Rolls Royce( cars, engines),
Diversification in totally General Electric, Samsung
unrelated areas. New Electronics, Tata.
areas may present better
growth options, entry
barriers may be low as
must be the investment
required.

Resource/ capabilities are

spread across.
Organizations can
diversify globally also.

How does an organization diversify?

This is the second option that an organization has to decide on, whether to go it
alone and set up a greenfield project or develop a diversified entity
through mergers, acquisitions/alliances or joint ventures.

Most of these options are similar in the sense they are based on the principle of
creating collaboration for the growth of two different entities. The differences among
them are more of a degree than direction.

The subtle differences between joint venture alliances and between mergers and
takeovers are more for conferring the legal status on the entity as well as the transfer
of funds and resources.

Diversification Approaches
A company needs to choose a path or approach to diversify its business. It may
choose either related diversification approach or unrelated diversification approach
or a combination of both, depending on circumstances.

The principal difference between the two is that related diversification emphasizes
some commonality in markets, products, and technology, whereas unrelated
diversification is based mainly on profit considerations. The strategists must consider
the realities of the situations for selecting the right approach for diversification.

Related Diversification Approach

Your company is pursuing a strategy of related diversification if you find that multiple
lines of businesses are finked with your company. Also known as ‘concentric
diversification,’ related diversification involves diversifying into a business activity
that is related to the core (original) business of the company.

The new business is operated in the same industry. Both the new business and the
core business have some commonalities in their value chain activities such as
production, marketing, etc. The value chains of both businesses possess strategic
ms.’
In the language of Hill and Jones, “related diversification is diversification into a new
business activity or activities by commonality between-one or more components’ of
each activity’s value chain.

Because of the existence of commonality in value chains in both the existing and
new businesses, business-to-business transfer of key skills, technological expertise
or managerial know-how is possible.

Commonality and/or strategic fits in value chains also help the company achieve
competitive advantage through reducing costs; sharing a common brand-name dr
creating valuable resource strength.

Companies usually implement related diversification strategies to build a competitive

advantage and achieve economies of scope.

The Ways for Related Diversification

An analysis of the practices of various diversified companies reveals that they seek
related diversification in either of the two ways or a combination of the two.

These ways are (a) related- constrained, and (b) related-linked. When the business-
units of a company share the inputs, production technologies, distribution channels,
etc. among themselves, the diversification, is known as related-constrained.

For example, BIC is said to follow a related- constrained diversification, as all of its
products (razors, cigarette lighters, and pens) share significant commonalities in the
areas of plastic injection molding, brand name, and retail distribution. On the other
hand, in the case of related-linked diversification, the business-units are linked on a
few dimensions.

The products are sold under various brand names, and they do not share common
technology or inputs across segments. For example, Walt Disney was a related-
constrained firm until the early 1990s. But it moved to related-linked firms gradually
when it started making movies for mature audiences and acquired ABC television.

Situations Favorable for Related Diversification

Research evidence suggests that related diversification does not always yield more
benefits than unrelated diversification.

So, the question is: When should a company opt for related diversification?

Experience shows that it is useful for a company to concentrate on related

diversification:

1. When the core competencies of the company apply to a variety of business, situations.
2. When the management of the company is capable enough to manage the affairs of
several businesses simultaneously.

3. When trade unions in the company do not create resistance to the cross-business
transfer of manpower and other resources.

4. When ‘bureaucratic costs’ of implementation do not outweigh the benefits derived from
resource-sharing between businesses. Bureaucratic costs arise mainly from coordination
efforts that are required among different businesses of the company.

Unrelated Diversification Approach

Unrelated diversification is also known as ‘conglomerate diversification’ or ‘lateral
diversification.’ An unrelated diversified company is known as a conglomerate.
Unrelated diversification involves entering into new businesses that are not related to
the core business of the company.

An unrelated diversified company has more than one businesses which are
operating their activities in different industries. As Hill and Jones remarked,
“Unrelated diversification is diversification into a new business area that has no
obvious connection with any of the company’s existing areas.” The value chains of
the businesses are dissimilar.

As a result, the diversified company has little opportunity to transfer skills, technology
or other resources from one business to another. Each business-unit in the unrelated
diversified company is a stand-alone entity. Each SBU remains responsible for profit-
making.

For example, Company A started initially with the business of producing a marker
pen. Subsequently, it started a business in mosquito coil and later in laundry soap
production. We can say that Company A is an unrelated diversified company
because its subsequent businesses have no similarity with its core business (marker
pen business).

The distinction between Related and Unrelated Diversification

Some differences between related and unrelated diversification approaches are
obvious:

1. Related diversification occurs within the same industry. New businesses are related to
the core business of the company. Unrelated diversification occurs in different industries.
It involves diversifying into totally new businesses that have no relationship with the core
business of the company.

2. Resource-sharing and skills-transfer between different businesses are the focus of the
related diversification approach. The main focus of the unrelated diversification approach
is to create shareholder value by acquiring new market segments.

3. Related diversification is conspicuous by the value-chain commonalities among the

businesses. However, we find the absence of commonalities in the value-chains of
different businesses in an unrelated diversified company.
4. Related diversification can create value in more ways than unrelated diversification.

5. Since management has prior knowledge about managing a similar type of enterprise,
they are better capable of managing related businesses Therefore, related diversification
involves fewer risks than unrelated diversification.

6. Higher bureaucratic costs arise from coordination among business units in a related
diversification company. In the unrelated diversified companies, there is no question of
cross-units coordination. As a result, their bureaucratic costs are much less than the
related ones.

Advantages of Unrelated Diversification

Unrelated diversification has certain merits.

The business enterprises usually adopt related diversification for enjoying a few
advantages, such as the following:

1. Spreading of risks over different industries

2. Profit prospects in other industries

3. Opportunities to offset losses

4. Increase in shareholder value

5. Quick financial gain

6. Greater earnings stability

Spreading of risks over different industries

Unrelated diversification involves entering into new industries.

Thus, it is possible to spread the business risks over different industries. Businesses
with different technologies, markets and customers have the potential of absorbing
j^isks related to the investment of the company.

However, research evidence indicates that related diversification is less risky than
unrelated diversification from a financial point of view.

Profit prospects in other industries

Unrelated diversification provides an opportunity to enter into any business in any
industry which has profit prospects. The company may acquire a business in another
industry having high-profit potentials.

Opportunities to offset losses

Because of investment in diverse areas of business activities, there is a possibility of
offsetting losses in one business with the gains in another business in another
industry.
Cross-industry offsetting of losses is very dim in related diversification due to the
operation of businesses in the same industry. In a diversified company, the cyclical
downswing in one business can be counterbalanced by a cyclical upswing in another
business.

Increase in shareholder value

Skilled corporate mangers can increase shareholder-value by taking over highly
prospective businesses in different industries.

Quick financial gain

There are opportunities for quick financial gain if the parent company resorts to
diversification through acquisition of businesses having under-valued assets that
have good profit potential. Financial gain can also be achieved if the new businesses
can be acquired with a bargain-price.

Greater earnings stability

Unrelated diversification offers greater earnings stability over the business cycle.
However, stability in earnings depends on managers’ ability to avoid the
disadvantages of unrelated diversification.

Disadvantages of Unrelated Diversification

The common drawbacks or disadvantages of unrelated diversification are as follows:

1. Unreliability in building shareholder value

2. Business-jungle and managerial difficulties

3. Dangers in screening businesses through acquisitions

4. Risk of the unknown

5. Insignificant contributions in building competitive strength

Unreliability in building shareholder value

Management experts are of the view that unrelated diversification is an unreliable
approach to building shareholder value unless corporate mangers are exceptionally
talented.

Business-jungle and managerial difficulties

When a conglomerate has a large number of diverse businesses, corporate
managers may find it difficult to manage effectively the ‘jungle’ of businesses.

Difficulties may abound in selecting right mangers, undertaking appropriate

measures when problems; arise, and making decisions when a business unit
stumbles.
Dangers in screening businesses through acquisitions
Unrelated diversification through acquisition of other firms requires a sound
screening from among the available firms. The’ diversifier-company may be at a loss
if it fails to astutely screen out the unattractive firms.

Screening out requires an assessment of the firms to be acquired by using different

criteria such as expected return on investment, growth potential, cash flow,
environmental issues, government policies, etc. In reality, only companies with
undervalued assets and companies that are financially distressed are good
candidates for unrelated diversification.

Risk of the unknown

A new business, acquired by the diversifier-company is an unknown entity to the
corporate managers. This may pose a risk to them. Any mistake in assessing
industry attractiveness or predicting unusual problems (such as forcefully taking into
possession by local terrorists in connivance with the owner-group) may prove fatal.

Wise men say; “Never acquire a business you don’t know how to run.”

Insignificant contributions in building competitive strength

Experience shows that a strategy of unrelated diversification cannot always create
competitive strength in the individual business units.

Diversification Examples
Google and diversification
Google founded in 1998 is a leading search engine. Google wrested its dominant
position in the search engine from Alta Vista, which was taken over by Yahoo.
Google’s diversified portfolio of businesses includes YouTube, Picasa, Google+,
Gmail, Google Earth, Chrome, and Android.

Meaning of Product Diversification:

The term ‘product diversification’ is sometimes called ‘product differentiation’. Product
diversification is a part of product line decisions’. The word diversification means that
something new will be added.

It may refer to a new company, a new technology, a new market, or a new product. So,
product diversification means addition of a new product (not the variations in the
qualities of the same product) to the existing product line or mix.

It is important to note that conscious and deliberate product diversification, whether in

the form of seeking new applications for the productive capacity and technological know-
how of the firm on the one hand, or alternatively of exploiting a firm’s knowledge of a
market which nay extend beyond its product range, is a matter of high-level
management decision.

For example, manufacture and sale of sewing machines in addition to electric fans
produced by a firm is a case of product diversification.
Objectives of Product Diversification:
According to Prof. Andrews, the different objectives of product
diversification are:

1. To gain stability in the firm’s earnings and organisation.

2. To attain efficiency in the utilisation of a firm’s resources — human, physical and

financial.

3. To increase sales of basic products and exploit the value of an established trade mark.

4. To increase the profits by offering different types of products.

5. To meet the demands and convenience of the diversified retailers.

6. To make profitable use of marketing opportunities.

Forms of Product Diversification:

There are several fonts or directions which a firm can follow for diversification. These are
shown in the table below. Essentially the firms can diversify in a concentric way – close
to present product/service lines – or quite differently from present product lines in
marketing and/or technological ways (conglomerate diversification).

Thus, we find three distinct forms of product diversification;

(i) Diversification into related product-line,

(ii) Diversification into unrelated product line, and

(iii) Product replacement.

The development and marketing of ‘food articles’ in addition to the existing ‘detergents
business’ carried on by Hindustan Lever Limited is an example of diversification into
related product line. This is a kind of concentric diversification aiming at serving similar
customers in similar markets. This is known as horizontal type of product diversification.

The development and marketing of different products like watches, tractors, bulbs,
printing presses., etc., by Hindustan Machine Tools limited is an example of
diversification into unrelated product lines. This is kind of conglomerate diversification
in relation to the market.

The development and marketing of an entirely new product as an addition to the product
line in order to replace a particular product of the same product line is known as product
replacement. This form of product diversification is sometimes adopted by a firm as a
defensive measure against the risk of dying out one of its products.
 Factors that Motivate Product Diversification:
Product diversification is accentuated by the presence of the following main
factors:

1. The development of science and technology offers scope for new products and causes
obsolescence of old and existing products. The business firms having a strong technology
base and high reputation in the field venture upon to enter into a new product line
through the application of modern technological methods.

2. An efficient management of a firm is always on the lookout for doing new things. They
believe that product diversification will help them avoid dangers of overspecialisation.

They think that development and marketing of new products, whether related or
unrelated to the existing product line, will lead to the growth and stability of the firm.
They see diversification as a way to convert internal cost centers into revenue producers’.

3. Industrial and economic policies of the Government encourage a firm to invest in its
research and development and this leads to new products as a base for diversification.

4. The feeling that the economy (or market) in which the firm is operating is too small
and confined to allow growth may prompt a firm to pursue the policy of product
diversification

5. The firm’s technology, research, and development produce products and by-products
which appear to be outstanding.

6. The impact of social changes and development on the consumers’ behaviour, demand,
fashion, and style motivates a firm towards product diversification.

PRODUCT DIVERSIFICATION ACCOUNTING TOOLS

Product diversification is the practice of expanding the original market for a product. This
strategy is used to increase the sales associated with an existing product line, which is especially
useful for a business that has been experiencing stagnant or declining sales. There are a number
of ways to engage in product diversification, including the following:

● Repackaging. The manner in which a product is presented can be altered to make it available to a
different audience. For example, a household cleaning product could be repackaged and sold as a
cleaning agent for automobiles.
● Renaming. An existing product could be renamed, perhaps along with somewhat different
packaging, and sold in a different country. The intent is to remain true to the original purpose of
the product, but to adjust it to match the local culture.
● Resizing. A product could be repackaged into a different size or standard selling quantity. For
example, a product normally sold as a single unit could be packaged into a quantity of ten, and
then sold through a warehouse store.
● Repricing. The price of a product can be adjusted, along with other improvements, to reposition it
for sale through a new distribution channel. For example, a watch movement could be inserted
 into a platinum casing and sold through jewelry stores, rather than its original positioning as a
sport watch.
● Brand extensions. It may be possible to extend an existing brand at the low or high end, or fill in
a hole somewhere in the middle of the product line. For example, a car company decides to build
a sports car that is positioned at the top end of its product line.
● Product extensions. It may be possible to sell several versions of the same product, perhaps by
adding additional features or by offering the product in different colors. For example, a smart
phone may be offered in several colors.

Product diversification can be expensive, especially when launching it broadly in a new market.
Consequently it can make sense to launch in several test markets to determine customer
acceptance before rolling out a new concept more broadly.

Diversification Strategies
There are three types of diversification techniques:

1. Concentric diversification
Concentric diversification involves adding similar products or services to the existing
business. For example, when a computer company that primarily produces
computers starts manufacturing laptops, it is pursuing a concentric diversification
strategy.

2. Horizontal diversification
Horizontal diversification involves providing new and unrelated products or services
to existing consumers. For example, a notebook manufacturer that enters the pen
market is pursuing a horizontal diversification strategy.

3. Conglomerate diversification
Conglomerate diversification involves adding new products or services that are
significantly unrelated and with no technological or commercial similarities. For
example, if a computer company decides to produce notebooks, the company is
pursuing a conglomerate diversification strategy.

Of the three types of diversification techniques, conglomerate diversification is the

riskiest strategy. Conglomerate diversification requires the company to enter a new
market and sell products or services to a new consumer base. A company incurs
higher research and development costs and advertising costs. Additionally, the
probability of failure is much greater in a conglomerate diversification strategy.

Why Companies Diversify?

In addition to achieving higher profitability, there are several reasons for a company
to diversify. For example:

● Diversification mitigates risks in the event of an industry downturn.

● Diversification allows for more variety and options for products and services. If done
correctly, diversification provides a tremendous boost to brand image and company
profitability.
● Diversification can be used as a defense. By diversifying products or services, a
company can protect itself from competing companies.
 ● In the case of a cash cow in a slow-growing market, diversification allows the
company to make use of surplus cash flows.

Risks in Product Diversification

Entering an unknown market puts a significant risk on a company. Therefore,
companies should only pursue a diversification strategy when their current market
demonstrates slow or stagnant future opportunities for growth.

To measure the riskiness or the chances of success of diversification, there are three
tests used:

1. The Attractiveness Test – The industries or markets chosen for diversification must
be attractive. Porter’s 5 Forces Analysis can be done to determine the attractiveness
of an industry.
2. The Cost-of-entry Test – The cost of entry must not capitalize on all future profits.
3. The Better-off Test – There must be synergy; the new unit must gain a competitive
advantage from the corporation or vice-versa.

Before considering diversification, a company must consider the three tests above.

Examples of Successful Diversification

Here are two notable examples of successful diversification:

General Electric
General Electric commonly comes in discussions when talking about successful
diversification stories. GE began as an 1892 merger between two electric companies
and now operates in several segments: Aviation, energy connections, healthcare,
lighting, oil and gas, power, renewable energy, transportation, and more.

Walt Disney
Walt Disney Company successfully diversified from its core animation business to
theme parks, cruise lines, resorts, TV broadcasting, live entertainment, and more.

How IKEA, Disney, and Berkshire Hathaway Succeed with

Adjacencies

Many adjacency moves fail because they’re driven by the wrong motives. But a lot
can be learned from those that succeed.

Research confirms, time and again, that when most companies diversify into
new markets, their profitability is diluted and acquisitions are subsequently
unwound—usually by a new CEO intent on creating a more “focused”
company. Consider Coca-Cola’s forays into wine and filmmaking, Eastman
Kodak’s venture into pharmaceuticals, and Philip Morris’s adventure with
Miller Brewing. Of course, adjacency moves are not always a disaster. IBM
successfully diversified into services; Disney does quite well with a portfolio
ranging from films to fun parks, children’s retailing, and cruise ships; Apple
successfully entered the highly competitive mp3-player, smartphone, and
online music businesses; and Berkshire Hathaway, a rail-to-chocolates
conglomerate, has the best 40-plus-year track record of shareholder returns
the world has ever seen.

Why do some adjacencies work and others not? In my experience, two factors
make the difference: The first is whether entering an adjacency materially
improves the value proposition of your current business, and the second is
whether it uses enough of your company’s distinctive capabilities to give you a
right to win in the new market.
As an example of the first factor, consider IKEA, the global home furnishings
company. IKEA identifies itself with a mission to provide well-designed
products at a lower price than anyone else can offer. And now it’s selling
televisions. Is this the typical adjacencies thinking? “Hey, if our customers are
buying furniture, they might also be in the market for TVs. Why not capture
that business while they’re already in our stores?” Well, no, IKEA does not see
itself as entering the TV market at all. Instead, the company aims to solve a
furniture challenge that many of its customers complain about: how to fit the
TV—and all the components, gadgets, and tangles of wires that come with it—
more seamlessly into the living room. So IKEA has integrated the television
into a furniture solution. IKEA is not trying to enter a new business (retailing
electronics); rather, it’s enhancing the value proposition of its current business
(functional home furnishings).
Now, let’s consider the second factor, taking Hewlett-Packard as a case in
point. HP started out in high-tech measurement machines that require a lot of
engineering design and implementation capabilities. When the PC revolution
occurred, HP realized that desktop printers were a natural extension of those
capabilities—and printers became a hugely successful business for the
company. But other adjacencies, such as enterprise computer services, have
not been as successful because HP’s capabilities were ill matched to their
requirements.

HP’s fortunes rose and fell based in part on its success with “capability
extensions,” which enable some companies to benefit from both focus and
diversity at the same time. Berkshire Hathaway provides a good example. Its
core capability is investing capital. Few companies are better at allocating
capital than the capital markets, but Berkshire is one of them. CEO Warren
Buffett built a company whose way to play is investing mountains of zero-cost
capital in well-managed companies that have mountains of opportunities to
invest that capital profitably. The insurance side of the company generates the
zero-cost capital and the other part (rails, utilities, retailing, etc.) deploys
it. Berkshire is the ultimate conglomerate, and yet it’s also very coherent:
every business in its entire portfolio gains advantage from—and contributes
to—its core capability.
Berkshire Hathaway’s specific core capability is very rare. But there are plenty
of other diversified companies whose portfolios are coherent because they
leverage and bring scale to their own unique sets of capabilities across the full
enterprise. Good examples are the Danaher Business System, Disney’s ability
to create and commercialize family-friendly characters, and United
Technologies’ ACE (Achieving Competitive Excellence) system. In each of
these examples, the company is defined more by its capabilities than its
portfolio, which at first blush appears to be just a diversity of adjacencies.
The best adjacency moves involve both fortifying the value proposition of your
business and leveraging its distinctive capabilities. This is why I said in my last
column that Apple’s creation of the iPod was one of the all-time best
adjacency moves. In the late 1990’s, on his famous long walks in the foothills
of the Santa Cruz Mountains, Steve Jobs was thinking hard about how to
make the Macintosh computer more central to consumers’ digital lives. The
Internet was becoming mainstream and Jobs wanted to make it easier for
consumers to connect their photos, videos, and music with their Macs. Thus
was born the iPod, which leveraged the company’s amazing capability to bring
together technologies that already exist into a beautiful, ergonomic, user-
enjoyable package. But not only was the iPod a wild success in its own right, it
dramatically enhanced the value proposition of owning other Apple products.
The Macintosh business benefited enormously because the iPod increased
the computer’s utility and made it even more hip to buy. It’ll be interesting to
see how Apple’s recently announced launch of an in-car operating system and
its intimations at taking another big run at the television market will unfold.
These ventures will succeed to the extent they improve the value proposition
of Apple’s other products—like the iPod, iPhone, iPad, MacBook, etc.—or
leverage the capabilities that have enabled Apple to succeed in a diverse
range of product markets.
So, how does a capable strategist choose the best adjacencies strategy for
his or her company? I say focus intently on answering this question: What
adjacency moves would best enable you to bolster the value proposition of
your current business or exploit and scale the distinctive capabilities you
already have? Gird yourself to resist the alluring temptation to pursue
adjacencies to compensate for slowing growth in your core businesses, exploit
a hot growth market, keep up with others, or upgrade your company’s growth
or margin profile. Such come-ons are what drove airline companies into car
rentals, led steel companies into buying construction aggregates, and
seduced pharmaceutical companies into consumer products

These adjacency moves all failed because their motives were wrong, and so
those companies missed growth opportunities in their core businesses while
also diluting their overall coherence—a double whammy that led to many lost
years. The best motive for pursuing adjacencies is to enhance the value
proposition of your current business while leveraging and scaling your
already-distinctive capabilities. This will strengthen your business and expand
its boundaries at the same time, producing high-quality growth of sustainable
earnings.
Products which flopped due to poor Diversification
Strategy
Brands spend years into building their presence and a perception in the mind of consumers.
After years of relentless efforts, brands build their own identity. And sometimes, such powerful
is their presence that their strength is used for diversification. But there have been occasions
where brands have failed where the diversifications have been quite off-color. Here are some
examples of brands which have failed due to wrong diversification.

New Coke
The Coca-Cola Company of Atlanta, is registered in United States since March 27, 1944. Ironically, it
was first used as a medicine until businessman Asa Griggs Candle led Coke to iconic heights of the
world’s soft drinks market. Its logo was created by Frank Mason Robinson in 1885. Coca Cola
Company keeps on re-inventing its products, to keep up with ever changing demands. Thus, it
launched an all new recipe in the form of New Coke in 1985. Roberto Goizueta, the then Chairman,
said in an interview that the New Coke tastes “smoother, uh, uh, rounder yet, uh, yet bolder…has a
more harmonious flavour”.Customers quite liked the flavour initially, but they soon started missing
the original Coke. In fact, the company also tried to salvage the drink by changing its name to Coca-
Cola II. After immense backlash from their fans, they withdrew the product and went back to the
usual ways.The new coke may still be available in Yap & American Samoa.