Does unrelated diversification create value for a brand?

Abstract

Investors are advised to keep a diverse portfolio. This is so that if one industry faces a slowdown, the investor can bank upon returns from other industries which are doing better. This is known as portfolio diversification. Imagine this scenario- your company is in the business of cultivating and selling coffee. One particular year, due to adverse weather for coffee crop, the entire cultivation fails, and the business faces severe losses. If the company, instead of having 100% reliance on only coffee business, had also ventured into other areas of business, it would have managed to bear the blow of failure from coffee arm of the business. This can be done by exploring business avenues in other sectors such as Livestock farming, Jute Cultivation, Café outlets, etc. This is known as Corporate Diversification. These examples point towards an important observation and an old adage- “Don’t put all your eggs in one basket.” Corporate Diversification is a means of growing the business by entering adjacent, related or unrelated business areas basis the current core operations. It is, however, different from mere geographic expansion of business. For instance, Virgin Airlines based out of the USA, trying to enter the Indian Market is a geographic expansion of the business. However, Virgin Company being present in various sectors such as entertainment, telecommunication, airlines, etc. is diversification of the business. The decision to whether diversify or not is a part of the Corporate level strategy. It is taken, keeping in mind various factors that affect the whole Organization, such as, shareholder value, availability of resources, human talent management, etc. The strategy of entering new markets and new business areas became prevalent 1950 onwards. At that point, companies diversified as a measure to improve profitability and spread risks. Entering a new business sector is not easy and requires rigorous amount of R&D, deep pockets, high risk appetite and efficient allocation of resources. To refrain from the tedious task of starting a new business line from scratch, companies these days indulge in Joint Ventures, Mergers and Acquisitions to diversify. This provides them with an incumbent customer base and market share and pre-created models or operations to run the business. For instance, Flipkart acquired Myntra when it wanted to venture into apparels etailing while “fashion at Flipkart” wasn’t doing too well.