Reasons for Failure of Diversification Strategy

Beware! Diversification could cost you

The ability to expand one’s venture in a state of economic turmoil shows great fore thinking and true leadership.  The will to expand the business when everybody else is drawing their strings shows great spirit. But to grow in a stagnant environment is a daunting task. So how do you do it? A superficial answer is “Diversification”. But it is not always the case. It is one of the ways to grow, not the only way.

Talking about the Advantages

There are advantages to diversification. You expand your product line, which means more possible business. A diversified company is likely to keep their necks above the water during economic turbulence which may affect their other businesses. Banks are generally more willing to bet on diversified companies since they are more stable and their shares rates are likely to go up.

The Downside

Financial and business advisors agree that highly diversified companies trade at discounts in the market since a diversified company is likely to have been diversified without appropriate strategic considerations risks duplicating its systems, distracted company leadership—since there is another company to look after— and potentially even racing in the rat race against itself.

Failed Diversification: Classic examples

National Semiconductor Corporation

One example of failed diversification is National Semiconductor Corporation. The company tried to make electronic consumer products in addition to the semi-conductors that went inside them (in the 1970s). But they overlooked one major flaw: the company wasn’t suited for retail manufacturing. In the process, it was crushed by companies that were very well suited for that purpose as well as insulated against any kind of financial downturn. By the time digital watches became popular in America (the company specialized in analog devices and subsystems), NSC had been driven from the marketplace, suffering huge losses that largely overshadowed its success in the arena of semiconductors.

Northrop Grumman

A more recent example of failed diversification is Northrop Grumman–an American global aerospace and defense technology company and the fifth-largest defense contractor in the world as of 2015, according to the wiki. Northrop has always been successful with electronics and robotic systems, but in 2001 it diversified into shipbuilding for the Navy. The venture was obviously very expensive, and a titanic one at that. The diversified plan had razor-thin margins and did not tune with any of Northrop’s other businesses. In 2011, Northrop declared that they got out of the shipping business to avoid “a drag on its bottom line for years to come.”

Virgin Cola

Virgin’s move to lock horns with Pepsi and Coca Cola is one that is legendary. Though Virgin’s brand encompassed virtually everything—from airlines to financial services, Richard Branson, founder of the Virgin empire, stretched himself too far. Coca Cola and Pepsi, as we all know, is synonymous with the elixir of life. Branson joined forces with Cott Corporation, and produced Cola under the Virgin name and marketed it spectacularly in New York’s Times Square. This move raised eyebrows from market observers as they knew it was difficult to take down Pepsi and Coca Cola.

Although Virgin Cola was priced significantly lower (15 to 20%) than the two leading brands, there were not enough customers. Partly, issues with distribution were to be blamed. Pepsi and Coca Cola managed to block Virgin from getting shelf space in more than half of the UK’s leading supermarkets. Meanwhile, Coke doubled its advertising budget. Virgin Cola failed to make even a single scratch in its worldwide sales. The band struggled to gain 3% of the market and has never made a profit even on its home turf, the UK.

The Lesson?

Diversification should be a well-planned Strategical move and should not exceed the budget of the existing company. The solution is not diversification for diversification’s sake. The solution is controlled and well-planned diversification and knowing your competition. Strong brands depend on exploiting competitors’ weaknesses. Even during tough times, stick with what you know.

Contact OurBusinessLadder Market Research Consultant for more about Failed experiments with Diversification.