Horizontal diversification in action
By Winnie Makena | April 28th 2021
Product diversification is a strategy employed by a company, at a business or corporate level, to increase profitability and achieve higher sales volume from new products.
In the words of Warren Buffet, “Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”
What is horizontal diversification?
The goal of a horizontal merger is to create a new, larger organisation with more market share. This is done by innovating or licensing new products, or through a merger or acquisition of another company. Unlike vertical diversification, all this is done without having to be involved in the production process of the new products. Here are a few examples of firms that successfully executed horizontal diversification.
Apple started out as a company just making and selling their computers. Today, the product list includes Mac, iPod, iPhone, iPad, Apple TV, OS X, iLife, iWork and iOS.
Apple, despite being such a big company, does not have its own production facilities. Everything is produced in China because of the favourable lower costs. This means Apple have not expanded vertically in the production line, they still have other companies producing components for their products.
Apple has integrated horizontally because they have expanded on the product line and not the production line.
Another way they diversified horizontally was in their software. They use a software different from their competitors, which is the key product offered. Without it, all the products being offered by the company would be generic. Apple has also over the years acquired dozens of smaller firms
2. Facebook acquiring Instagram
In 2012, Facebook acquired Instagram for $1 billion. Both Facebook and Instagram operated in the same industry; social media, and shared similar production stages in their photo-sharing services. Facebook sought to strengthen its position in the social sharing space and saw the acquisition of Instagram as an opportunity to grow its market share, reduce competition, and gain access to new audiences. Facebook realised all of these through its acquisition. Instagram is now owned by Facebook but still operates independently as its own social media platform. With Instagram now at an estimated value of $102 billion, Facebook’s horizontal integration of Instagram was truly historic with a return in investment of 100 per cent in just over nine years.
3. Disney acquiring Pixar
Walt Disney Company’s $7.4 billion acquisition of Pixar Animation Studios in 2006 is a great example of horizontal integration. Disney began in the early 20th century as an animation studio that targeted families and children. However, the entertainment giant was facing market saturation with its current operations along with creative stagnation.
Pixar operated in the same animation space as Disney, but its (digitally) animated movies used cutting-edge technology and an innovative vision. Keen to modernise their traditionally hand-drawn animation, the company, rather than start from scratch, acquired a smaller competitor with the requisite levels of experience and expertise already in place. The deal is now widely considered to have literally and figuratively reanimated Disney, expanded its market share, and boosted its profits.
4. Pepsi and Coca-Cola
Coca-Cola is the number one soft-drink company and Pepsi takes second place. Both have similar strategies for growth. In 1965, for instance, Pepsi merged with the snack-food giant Frito Lay, resulting in an increased focus on snacks. Lay’s, Doritos, and Cheetos are owned by Pepsi. They have also diversified into fruit juices (Tropicana), energy drinks (Gatorade), mineral water (Aquafina) and, in recent years, have even signed a deal with coffee giant Starbucks to distribute certain products in Latin America.
Although Coca-Cola has generally ignored the snacks market, it’s drinks portfolio almost mirrors Pepsi’s. It also sells fruit juices (Minute Maid), energy drinks (Powerade), mineral water (Glaceau), and coffee (Costa Coffee). It even made an eventful foray into the wine market in the 1980s.
The companies’ horizontal diversification strategies made both Pepsi and Coca-Cola now own nearly all the successful beverage brands in the world, driving value and revenue far beyond their own original products.
5. Quickmart and Tumaini
Closer home, there was the merging of Quickmart and Tumaini. The mushrooming of Quick Mart stores around towns in Nairobi is a sign of its quick growth strategies. Adenia Partners (a Private Equity firm investing in Sub-Saharan Africa) in 2019 announced that it had completed a majority investment in Quick Mart Limited, which operates a chain of 11 supermarkets in Kenya. Quickmart had nine stores located in neighbourhood estates in Nairobi, and another two in Nakuru.
The deal was structured by Adenia Capital (IV), a EUR230 million investment fund, and the funds were used to expand Fast Mart’s store network in convenient neighbourhood locations. In addition, the investment would improve operating efficiencies in line with international retail best practices.
Quickmart was subsequently merged with Tumaini Self Service Limited, another supermarket retailer in Kenya that Adenia acquired in 2018, as a result of the acquisition. Quickmart and Tumaini now have a combined store network of 25 locations, making the combined business the third largest retailer in Kenya by store network, with Adenia being the majority owner.
Sometimes diversification fails
Richard Branson, founder of the Virgin empire owns virtually everything from airlines to financial services. Locking horns with Pepsi and Coca-Cola was however a legendary fail. Branson joined forces with Cott Corporation, and produced Cola under the Virgin name. Virgin Cola despite being priced 15 to 20 per cent lower than the two leading brands, couldn’t garner enough customers. Partly, issues with distribution were to blame. 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 brand struggled to gain three per cent of the market and has never made a profit even on its home turf, the UK.
What to do if planning to diversify…
1. Have a well-planned strategy that should not exceed the budget of the existing company.
2. Know your competition. Strong brands depend on exploiting competitors’ weaknesses.
3. The most obvious benefit of diversification is an increased market share for the company meaning an increased customer base and consequently, increased revenue. So make sure that this is what is bound to happen after diversification.
4. Beware of the downsides:
a.) It is a risk. Developing new products is always a risk. Also, the business’ lack of experience working within the new market breeds great uncertainty.
b.) Monopoly breeds greater scrutiny. When large corporations merge, they lead to monopolies and consumers suffer the consequences. With market dominance, companies may become unethical and hike prices. While this disadvantage is to consumers, the company may be highly scrutinised by the competition and authorities.
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