There are several ways to grow your business. One is to grow by doing what you are already doing through business growth of your particular product or service. Another way to grow your business is through business diversification by adding other products or services.
There are both pros and cons to diversifying your business. It can give your company an effective path to fast growth by branching out into a new business opportunity. This exposes your company to a new market segment that you don’t already operate in.
Another benefit is that you can minimize business risk during a recession or economic downturn. Some successful examples are General Electric and Disney. Both companies have greatly benefited from their diversification strategies.
Business diversification also has its cons. It can take a lot of resources to launch a new product and service or acquire an existing business. Mismanaged diversification can lead to your company being overextended, limiting the focus a business needs. Diversification poorly executed can also lead to financial losses and damage to your brand. To avoid costly failures at business diversification, here are some SMART tips to help.
Know the Resources it Will Take to Succeed in the New Market
Before you can diversify, you need to make sure that you have the finances, expertise, and resources available for success. Quaker Oats had successfully diversified into beverages with Gatorade. The company thought it could do the same when purchasing the popular beverage Snapple for $1.7 billion in 1994.
Things started badly from the beginning. Quaker Oats grossly overpaid for the company, by some Wall Street estimates $1 billion more than the company was worth. The company also failed to follow a fundamental law in mergers and acquisitions: Know how to run the company; bring specific value-added skill sets and expertise to the operation.
Quaker Oats failed in understanding Snapple’s market and couldn’t meld the vastly differing cultures. As a result, they fumbled badly on Snapple’s subsequent advertising and branding campaigns.
After just 27 months, Quaker Oats ended up selling Snapple for just $300 million dollars. The company lost $1.4 billion ($1.6 million a day under the company’s ownership) in this business diversification attempt. Pepsico later acquired Quaker Oats in 2001.
Your path toward business diversification will be decided by how much risk you want to take, how much money you have available, and what you have to offer. You need to know what you can afford and what it will cost to continue should things go awry.
Have a plan with set parameters to cut your losses if need be. This way a failed diversification attempt won’t take the rest of the company down. Lastly, know your limits and strengths. List all the potential barriers to success and proactively work to solve them before they occur. What are the synergies that you can realize? Get outside counsel to make sure the diversification strategy you want to take makes sense given your current situation.
Add Value and Be Better Than the Competition
Richard Branson’s Virgin empire is well-known and admired. While succeeding in the airline, music, financial, and other industries, it tried to take on Coca-Cola and Pepsi by launching Virgin Cola.
Both Coke and Pepsi were able to block Virgin from getting shelf space in many retailers. After much fanfare, Virgin Cola ended up closing down. Branson says he learned a valuable lesson from the failure.
“The problem was that, you know, we didn’t have something completely unique,” he says. “We had a great brand. But Coke had a great brand. The taste of the Cola was maybe marginally better. But it was neither here nor there.”
“So since then what I learned from that was only to go into businesses where we were palpably better than all the competition.”
Before looking at diversification strategies, approach experts and product marketing companies. They can help determine the resources you need and if your new product or service will be better than the competition. Take time to research the market and the competition. Make sure that you will add enough value that customers loyal to your competition will be willing to switch over.
Look at Controlled Business Diversification
There is a fine line between diversifying because everyone is doing it and doing it to stay relevant in today’s fast-moving economy. Diversifying doesn’t mean you will automatically be successful. Sometimes it is better to just focus on making your product and service better.
Michelin has focused on making its tires better and dominating its market as opposed to being a smaller player in another. This makes sense given the high barrier to entry in the market. For the foreseeable future, people will need cars, and cars will need tires. New technology won’t change that.
If you are in an industry that can be disrupted and made obsolete, (Blockbuster, Borders, etc.), then diversification will give you the multiple streams of income your company may need. Before blindly looking to diversify, it is important to learn the different types of business diversification:
- What: Offering or acquiring new parallel products and services to your existing core business line which appeal to your current customer base.
- Goal: To realize economies of scope and synergies.
- Example: A notebook company decides to starts a new pen product line to offer to its current notebook customers.
- Real-World Example: Marriott (the hotel chain) in 2016 purchased Sheraton hotels and Disney’s 2006 acquisition of Pixar Studios.
- What: Diversifying by controlling other stages of production for your product and service. Backward vertical diversification is expanding backward on the production path. So a retailer would purchase a manufacturer. Forward integration is expanding forward on the production path. A manufacturer opens its own retail locations and removes the distributor as a middleman.
- Goal: To control the process, reduce costs, and improve efficiencies.
- Example: The notebook company enters the paper mill business to get a regular supply of paper at lower prices.
- Real-World Example: Netflix originally supplied movies and TV from other studios. They then diversified vertically by creating their own TV and movie original content. Amazon used backward integration by becoming a publisher of books and forward integration by owning the warehouses and delivery methods.
- What: Offering or acquiring new products and services closely related to your core business to enter one or more new markets.
- Goal: To fully utilize current technology, marketing, and other company systems to realize economies of scale, efficiency, and reduce market risks.
- Example: The notebook company starts making notepads and journals (the same technology and processes used to make the notebook).
- Real-World Example: PepsiCo diversified its product line from soft drinks and snacks to closely related fast-food franchises such as Burger King and Pizza Hut, and other food-related companies such as Tropicana, Quaker Oats, Muscle Milk, and many more.
- What: Offering or acquiring new products or services that are not related to your core business to enter one or more new markets.
- Goal: To grow at a rate faster than can be achieved through organic expansion to appeal to an all-new market base.
- Example: The notebook company acquires a local restaurant chain.
- Real-World Example: Warren Buffett’s company Berkshire Hathaway is most of the most well-known conglomerates with a majority stake in 50 companies. General Electric, originally founded by Thomas Edison has diversified into energy, real estate, telecom, healthcare, and more.
Controlled Business Diversification
Controlled diversification is diversifying your business in a disciplined way that focuses on maximizing benefits and minimizing risks. McDonald’s is a good example of using controlled diversification. Instead of diversifying out of its sphere of expertise and taking on unnecessary risks, it has focused on diversifying to support its core fast-food business.
In 2019 McDonald’s acquired Dynamic Yield, a company specializing in personalization and decision logic technology. The decision technology allows McDonald’s to vary its outdoor digital drive-thru menu displays to show food based on time of day, weather, current restaurant traffic and trending menu items.
The technology also suggests and displays additional items to customers’ orders based on their current selections. McDonald’s also acquired another tech company, Apprente, which McDonald’s describes “an early stage leader in voice-based, conversational technology.”
McDonald’s also invested heavily in its global mobile app, self-order kiosks, and digital menu boards. The main goal? To provide a seamless ordering experience for their customers.
“By acquiring Dynamic Yield, we also have access to strong data science and engineering talent, who will help us stay ahead of the curve when it comes to connecting with our customers in more personalized ways. This acquisition is just one tangible demonstration of the steps we’re taking to leverage industry-leading, innovative technology to accelerate our growth and offer our customers an even easier, more enjoyable experience,” said Stephen J. Easterbrook, president, and CEO of McDonald’s.
McDonald’s also has diversified into the delivery business. Delivery has grown to a $3 billion business for McDonald’s restaurants globally, and the company now offers delivery in more than 20,000 restaurants across 75 countries, marking more than half of all McDonald’s restaurants globally.
“Awareness remains one of our greatest opportunities with delivery,” Easterbrook said. “So, we’re committed to making sure more and more customers are aware of McDelivery and the opportunity that exists for them to enjoy McDonald’s wherever they are.”
Even by diversifying into different industries McDonald’s is sticking to what it knows, fast food. Its controlled diversification strategy has been to acquire companies to bolster its expertise in the fast-food business by keeping costs low and efficiencies high.
This controlled diversification isn’t just adding more “mcproducts”, buying suppliers, the franchises, or offer a completely unrelated product. Their diversification has focused on accelerated growth by offering their customers an even easier, more convenient and enjoyable experience.
Communicate, Integrate, and Execute in a SMART Way
While on paper the merger of Time Warner and AOL, Quaker Oaks and Snapple, and the launching of Virgin Coke were great ideas, the execution was poorly done. Reports show that these companies had vast cultural differences with internal animosity, bickering, and different processes and systems that made post-integration plans difficult to execute.
Balancing growth and maintenance is not always easy. While the tendency is the desire to grow quickly and prove that the business diversification strategy is working, it is better to communicate to all parties on the intent, the what, why, when, who, and how.
Employees scared of possibly losing their jobs will prioritize protecting them instead of taking advantage of synergistic opportunities. Leaders need to communicate constantly, take each milestone in a methodical and effective way, and be attuned to the market, competition, and its brand.
Business diversification should not exceed the budget, expertise, and skill set of your company. The key to success in business diversification is a controlled and well-planned diversification and knowing your new acquisition or market, as well as the competition.