What Is an Example of Diversification in Business?

The need for diversification of business can arise not only in the wake of success and prosperity but also against the backdrop of financial problems. Diversification meaning in business refers to the company’s development strategy, which allows it to introduce additional business areas different from those the company previously offered.

Usually, a business needing change creates a new product that differs from its competitors, thereby expanding its sales markets. Business diversification also involves updating the company’s skills, knowledge, and technology.

Diversification in business helps companies remain profitable even in times of economic turmoil, society transforms, and the consumer base changes. In some cases, companies resort to diversification strategies to control risk and help grow their business. Check out business diversification examples that can help a company in need of change to scale the market and increase profits.

Business diversification example in the banking sector

A striking example of diversification in the banking sector is the creation of brokerage companies. Many banks create their own brokerage companies, as they understand that their clients are ready to invest their funds not only in bank deposits. Thus, they do not lose their audience, which would go to some brokerage company by simply expanding the list of services. Often, large financial institutions merge with other banks to improve service and generate greater profits.

Examples of diversification strategy in the banking sector include using such tools:

• brokerage companies
• insurance companies
• exchange markets.

Another example of diversification strategy in the banking sector is the building of an entire business ecosystem by opening, for example, telecommunications, brokerage, insurance, and management companies. Many giants of the financial market are not limited only to the banking sector and significantly expand their business horizons.

Business diversification strategy examples in the restaurant business

Keeping up with the times, restaurateurs have long been not limited to serving dishes directly in the halls of their establishments. They organize delivery services and offer dishes on other platforms. Diversified business examples in the restaurant field include opening:

• pizzerias
• coffee houses
• wine bars
• canteens.

Even McDonald’s is changing its business concept, despite being the world’s food service leader for nearly 65 years. In January 2023, the company opened its first takeaway-only restaurant on London’s Fleet Street. This business diversification strategy example shows that even the undisputed market leaders need to innovate to maintain their positions.

Diversification examples of companies in the energy field

Energy companies are solely responsible for supplying electricity to homes, industries, offices, factories, and other facilities. Their services and products are vital to users. Energy companies often infiltrate other business areas to provide customers with more efficient services. Company diversification examples in the energy field include engaging in such areas:

• transport
• oil and gas
• aviation.

Nowadays, against the background of the energy crisis, many companies use business diversification and focus on renewable energy technologies. As a result, there are many start-ups associated with wind, solar, and other environmentally friendly energy sources.

Business diversification examples in the field of construction

Most of the leading construction companies also use strategies of growth and diversification. They are not only directly involved in the construction of facilities but also produce high-quality equipment, building materials, and other relevant products. If a construction company has already won people’s trust with its reliable buildings, then customers are more likely to willingly buy other products under this brand.

Types of diversification in the construction business:

• demolition of houses
•  pipeline arrangement
•  road projects
• services for the sale and rental of heavy construction equipment.

During the COVID-19 pandemic, the construction business has been one of the hardest hit financially. Against this background, construction business companies were forced to take action and use diversification in strategic management, expanding the list of their services.

Is it a good business strategy to diversify? Successful examples of business diversification

A prime example of a company successfully using diversification is the world-famous giant Netflix. Its diversification strategy includes offering mobile video games to subscribers in addition to Netflix online store, which already sells limited-edition clothing featuring viewers’ favorite TV show characters. Netflix can be seen as an example of a successful diversification growth strategy as the company already has excellent software and resources to develop and produce tech content such as video games.

However, there are risks that current Netflix subscribers who use the platform to watch video content will not be interested in video games. Video game development is also not one of Netflix’s core competencies, and the games industry is very competitive, so it can be challenging to break into this business segment and attract customers.

Let’s take the example of Blue Circle Industries, a British company that is one of the world’s leading cement manufacturers. In 1980s, Blue Circle decided to use diversification growth and opened a branch dealing with construction. After that, they opened companies for waste disposal, bathtubs, and even lawn mowers. According to one retired executive, the company was guided by the fact that there would likely be a garden with a lawn near every house they built, and a lawn mower would be required to care for it. The Blue Circle’s attempt at market expansion through diversification was successful.

In 1989, the British beer company Boddington Group was forced to look for new business directions and try different diversification types. It sold the brewery and purchased resort hotels, restaurants, nursing homes, and health clubs while maintaining an extensive portfolio of pubs. The company’s CEO, Denis Cassidy, shared it was rather painful to give up brewing, especially since the brewery has been part of the business for more than two centuries. Due to business changes that occurred, the company’s management realized that they could not become serious competitors for giant brewing brands. The bord of directors made up their mind to use excellent retail, hospitality, and property management skills to stay afloat.

The Walt Disney Company has diversified from its core animation business to theme parks, cruise lines, resorts, broadcast television, and retail. It became an iconic example of successful conglomerate diversification. Conglomerate diversification meaning is the assortment range expansion with new products that are not related to the previously used technology. Disney’s cross-promotional relations with McDonald’s and Mattel have given it a retail edge, and close working relations with the Florida state government have provided the company with the vital experience for building an amusement park chain.

Honda Motor Company is famous for its automation manufacturing services. Before becoming a multinational business conglomerate, the company was first established as a manufacturer of auxiliary motors for bicycles. Honda has successfully diversified into the automotive industry by leveraging its unique knowledge of the engine industry.

Let’s look at the history of Sharp Corporation, which also successfully used diversification strategies in strategic management. In the early 1950s, the company decided to capitalize on its strengths in manufacturing and retailing radios, moving first to television sets and then to microwave ovens. Sharp licensed television technology from RCA and purchased microwave oven technology from Litton, an American pioneer in this business area. Using such a pattern, the company diversified its electronic calculator business in the 1960s by getting the necessary technology from Rockwell.

Examples of failed business diversification

The experience of Coca-Cola, famed for its deep consumer insights, solid knowledge of marketing and branding, and superior distribution capabilities, can be considered an unfortunate example of business diversification. Building on these strategic assets, Coca-Cola decided to break into the wine business in the early 1980s. However, the company’s management quickly discovered a lack of critical knowledge in the wine business. Having 90% of what it took to be successful in a new industry wasn’t enough for this market giant because it didn’t have the essential 10% – the ability to produce quality wine.

Successful business diversification is somewhat similar to poker: you have to know when to hold and when to fold. If a company owns only a couple of strategic assets in an industry with the majority of powerful players, there is no point to raise the stakes and risk diversifying in that business direction. If you are on the list of such industry leaders, you can apply concentric diversification. Concentric diversification example is the replenishment of the range with new products that are technically or marketing similar to existing products of the company. Concentric diversification is also called as convergent diversification.

Let’s take the experience of Japanese consumer goods giant Kao. Kao’s chemical division developed technology that allowed the company to alter or smooth the surfaces of products such as clothing items and magnetic tapes. At the end of the 1980s, Kao provided that technology to its detergent business division, and it immediately became a breakthrough. The technology made it possible to create an innovative type of washing powder (it was named Attack and was protected by 91 patents). Kao’s share of the laundry detergent market in two years increased from 30% to 56%. This is one of the best examples of concentric diversification that brought the company great profits.

Hoping to build on that business success, Kao transferred the same technology to its floppy disk division. Thus, the company decided to apply conglomerate diversification as well. The attempt did not bring the desired result. Simply put, the technology put the laundry detergent business to a new level, but the floppy disk business didn’t succeed because competitors already had similar effective technology. The Japanese corporation tried to break the market with a strategic asset that did not give it a competitive advantage.

Summary

A diversification strategy is used for entering new business markets or increasing share in current markets to become more successful. Also, diversification can become a great solution for overcoming difficult period in the company’s life. A company can diversify in several ways, including acquiring a new business, adding a new market segment, or selling new products or services. A flower shop owner, for example, can add photo and video services, meeting the demand of wedding planning vendors.

A website developer can offer SEO services for companies with existing websites that want to make sales higher through attracting more new users. In addition, a business can diversify through expanding the segment of customers who can use its product or services. A software developer can diversify horizontally by selling the same electronic document management system to different unrelated industries.

However, a diversification into new business fields under the same brand can scare away regular customers or convince them that the brand is no longer a business leader in its field. So, KFC is gradually introducing dishes unusual for this chain, such as hamburgers or fish, but these initiatives can damage the brand’s image as a leader in the fast food category of chicken dishes over time. Therefore, diversification should be used carefully after studying competitors’ offers and comparing all the business risks.