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Free «Diversification Strategies» Essay Sample

One of the most challenging decisions facing the management of companies is whether to diversify or not mainly due to the extreme consequences facing such a decision. Diversification can bring about both positive and negative outcomes; a company may succeed or fail. Companies choose diversification as the most viable option in increasing its market share as well as attracting and maintaining new customers. In other words, diversification is used by businesses to gain a competitive advantage over its rivals. However, before making such a critical decision, the management of any company that is contemplating diversification in it business model should ask several questions in an attempt to identify the risks and opportunities associated with such a move. Relying on Markides (1997), the critical questions should touch on the following issues. Firstly, what the company can do better than its competitors? This will help the company to become successful in a new market. Secondly, the company needs to identify the vital assets required for successful entrance in the new market. These assets are those that put the company at a competitive advantage over its rivals in the new market. Thirdly, the management should also look into ways in which the company can outdo the competition of its rivals in the new market. Markides (1997) advises that this can be done by implementing new competition strategies. Fourthly, a company contemplating diversification should identify its position in the new market. This will determine whether it is a normal player or it is above the rest. Therefore, it is advisable for a company to ensure that its products and services are so unique that its competitors cannot easily imitate them or find substitutes. Moreover, when choosing diversification, a company should ensure that its strategic assets are linked so as to achieve efficiency. If a company finds out that choosing diversification will weaken its strategic assets, it is advisable that such a decision is reviewed. Finally, a company choosing to diversify should be ready to learn from such an experience so that it improves its organizational efficiency (Markides, 1997).

Over the years, there have been several diversification success and failure stories. Companies that tell about success stories include General Electric, Disney, Amazon.com and 3M among others, whereas companies with failure stories include Quaker Oats, RCA and Time Warner. This paper will compare and contrast the success story of Amazon.com and the unsuccessful  Time Warner/AOL merge story.  

Company Profiles

Amazon.com was originally a retail books and music store that officially went online in July 1995 revolutionizing the traditional book retail stores (Reyes, n.d). Its venture in e-commerce saw the company perform online auction of other goods such as electronic cards, toys, computer hardware as well airline tickets and hotel rooms. The success of Amazon can be attributed to its diversification strategy of using the internet as well as selling different goods. According to Reyes (n.d) Amazon’s e-commerce success can be linked to its business model of category killer that engages and attracts browsers in a way that they become buyers. Additionally, the websites are personalized, so the buyers can give their reviews, hence creating an online community between the customers.

According to Mirow (2005), Amazon and its subsidiaries run seven retail websites that include amazon.com, joyo.com, a9.com, alexa.com and imdb.com. These websites provide retail services for books, music and movies as well as computer electronics. The attraction of a large customer base can be attributed to its strategy of customer focus, so the customers are the first priority and, hence, they receive the benefits of low prices, convenience and availability of an extensive choice of goods (Mirow,2005). This has seen the company attest to a customer base of over 27 million which has been steadily rising over the years. Globally, Amazon has been gaining popularity at a slow rate due to cultural and language diversities (Marin, 2007). However, in 1998 Amazon introduced its services in Germany and the United Kingdom as well as in France and Japan in 2000 (Martin, 2007).

Financially, Amazon increased its returns from US$ 15.7 million in 1996 to US$ 6.9 billion in 2004 due to the increased market base (Mirow, 2005). However, the company experienced considerable losses due to such operating costs as new systems development which would ensure that its rivals do not catch up; Amazon always aims at staying ahead of its competitors in e-commerce.

On the other hand, Time Warner is an entertainment company, established by Warner Brothers in the 1920’s. According to Verma (n.d), the company was officially registered in 1923 and since then it has been an active player in the entertainment industry. To acquire its current name, in 1989 the company merged with the Time publishing firm and became Time Warner (Verma, n.d). This move expanded the business operations of the company to become a multi-media entity dealing with “motion picture, television production, studio operations, film libraries, book and magazine publishing as well as record labels” (Verma, n.d). To diversify further, in 1996 the company purchased Turner Broadcasting System, hence, becoming the second largest cable television network in the US.

To remain relevant in today’s changing world, Time Warner decided to merge with the internet provider firm, America Online. This move was aimed at benefiting both companies from the e-commerce. The merger would benefit Time Warner in that it will be able to maintain its customer base by providing them with internet services where they can receive news and entertainment materials online. On the other hand, AOL would benefit in that its revenues would increase since its core operations of subscriptions, advertising and marketing and e-commerce would expand (Verma, n.d).

Diversification Strategies and the Outcomes

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Amazon.com

In order to gain a competitive advantage over its rivals, such as Barnes and Noble, Amazon adopted the strategy of offering a wide range of books that not only entailed simple processes but were also cheap (Reyes, n.d). Furthermore, the online Amazon community ensured that Amazon’s customers had a sense of belonging, hence, increasing the overall sales. In other words, Amazon has focused on creating an internet based business model whose core areas are marketing and sales as opposed to focus on production (Reyes, n.d).

Amazon’s e-commerce success can be attributed to the adoption of Amit and Zott’s (2010) four sources of value creation: efficiency, novelty, lock-in and complementarities (Reyes, n.d). Firstly, Amazon gives a wide range of merchandise to its customers, hence giving them an opportunity to make informed choices. According to Martin (2007), Amazon continues to expand its market share through the establishment of e-malls where shoppers get a wide range of products. The e-mall concept has ensured that all the stakeholders in the e-business trade (customers, merchants and Amazon.com) get their fair share. Through the Amazon’s online community consumers can share ideas and discuss issues among themselves and, therefore, they are well-informed before purchasing any commodity. Additionally, customers are able to make informed choices by reading critiques available on Amazon’s community site. Furthermore, Reyes (n.d) points out that the use of the internet improves Amazon’s efficiency in that it is able to offer a wider ‘range of products and powerful search capabilities as compared to its offline rivals.

Moreover, Amazon’s online bookstore enables customers to view books by the same author or with the same titles but by different authors. This enables customers to purchase different books without tiresome manual searches such as those in offline bookstores. On the side of the Amazon, this is a selling strategy: a customer will be attracted to buy a book with a similar topic for comparison purposes. Customers may also buy several books from an author that they like.

The success of Amazon’s e-business can also be attributed to the simplicity and accessibility of the online bookstore and availability of the ‘one click feature’ (Reyes, n.d). This has further enabled customers to write book reviews which are used as a reference by other customers before purchasing a similar book. As aforementioned, through reading such reviews potential buyers will be able to make informed choices before purchasing any merchandise.

Furthermore, the creation of an online community has ensured the creation of a lock-in, so it is hard for customers to switch sites since everything is available under one site. This online community has increased the market share of Amazon as it enables cross-selling: a customer buying a ticket will come across books and computer merchandise that might interest him (Reyes, n.d).

The ability to balance between competitive pricing and low operating costs has also ensured that Amazon operates a profitable online business. Amazon has formulated its e-business model in such way that it benefits both the customers and the company.  According to Reyes (n.d), Amazon maintains low operating costs in order to ensure that the costs are not transferred to the customers; prices remain competitively low despite the operating costs incurred by the company.

Reyes (n.d) also maintains that Amazon’s diversification success story can be attributed to the effective distribution system of the company. This has been facilitated by the company’s location in Seattle which is home to the largest book warehouse, which means that the acquisition of books for distribution to customers is without much delay. In addition, the company does not incur the costs of storage.

Finally, Amazon has been successful in its diversification strategy as it provides an integrated entertainment program that contains target advertising and emailing system (Reyes, n.d). Customers get online advertisements that are not only entertaining but also informative. In this way, Amazon markets its products to a wide range of customers.

Time Warner/AOL merger

The story of the Time Warner diversification move was the opposite of that of Amazon. In 2000, Time Warner decided to merge with the AOL internet provider so as to ensure that it is not outdated in the age of internet broadcasting. The management of Time Warner decided that it was best to merge with AOL in order to remain relevant in the future; this was an effective way of distributing  its contents through online channels and it was cheaper to use an existing provider as opposed to coming up with a new one. On the other hand, AOL viewed the merger as a new avenue of creating more revenue through subscriptions, e-business and advertising (Verma, n.d). In other words, it can be said that the merger was aimed at creating a symbiotic relationship where both companies would benefit. Initially, the merge yielded supernormal profits but with the emergence of the internet bubble this project started experiencing great losses (Verma, n.d).

The fail of the merger can be attributed to several reasons. Firstly, the companies were no match for each other, especially financial-wise, since AOL was facing great financial shortcoming due to the internet bubble (Verma, n.d). Time Warner was a big profitable company and by making a deal with AOL, it was indirectly shouldering the financial deficit of AOL. In other words, Time Warner was paying more than enough for the services it received.

Secondly, Verma (n.d) points out that both AOL and Time Warner did not implement their visions nor communicate them. There was laxity in the management of both companies; they did not market themselves through all possible channels. Moreover, both companies failed to identify the new trends in the digital industry that were vital for their success. Generally, the companies did not make new inventions despite them merging and were instead overtaken by other upcoming and successful companies such as Apple. 

Furthermore, AOL was quite slow to offer broadband access to its customers and, hence, lost them to the local phone companies (Verma, n.d). Consequently, AOL lost its command in the market and, hence, could not promote the AOL Time Warner content and lost further in revenue from advertising.

Another reason for the failure of the AOL Time Warner merger was that each company’s management was not fully committed to the project. According to Verma (n.d), interviews show that none of the board of directors of both companies was optimistic about the idea of merging both companies. Each of the companies entered the agreement with the hope that they were going to get supernormal benefits. They held the view that they did not have to leverage each others` strengths.

Reasons for the Different Outcomes

From the above discussion, it is evident that there were several factors that led to the success of Amazon and the failure of Time Warner. First oneis focus on marketing, which is a key factor that was applied differently by Amazon and Warner. Amazon aggressively advertised and marketed its products and services through all available channels, whereas Time Warner did not explore its market horizons. As aforementioned, Warner did not use all possible channels to market its contents.

In the second place, leveraging of company reputation and image is vital. For Amazon, leveraging of its image and reputation was a core area in its value creation chain. On the other hand, AOL Time Warner did not focus on strengthening its brand and image. For instance, AOL did not work hard to maintain its customers and, hence, lost them to other companies offering similar services. 

Moreover, innovation and creativity is another factor that led to the different outcomes. Amazon was and still is successful due to its innovative and creative nature. For example, it is through creativity that this company has managed to establish e-malls where unlimited products can be found, hence elevating e-commerce further. Conversely, AOL Time Warner was reluctant to implement new services, such as broadband, and hence they were overtaken by other service providers.

Another reason for the different outcomes is the commitment to implement and communicate the company`s visions. To be successful, Amazon embarked on a mission to satisfy its customers while at the same time staying at the top. Its competitive low prices for customers proved that it values its customers.  However, AOL Time Warner did not live by its visions of being customer focused, as exemplified by their lack of provision of broadband to their subscribers.

Recommendations for AOL Time Warner

For the merger to be successful, aggressive marketing should have been adopted by AOL Time Warner. Warner should have used all channels possible to markets its contents. The internet should have been used to send advertisement e-mails to subscribers. Additionally, the company should have adopted an integrated entertainment programming that contains advertisements of the company’s products. 

The second recommended action that the company should have done is focus on customers. It is general knowledge that the most important asset in a business is its customers. Therefore, the company should have ensure that through innovation and creativity, customers received new and competitive services, such as broadband, and other entertainment materials, such as music. It is evident that when a customer lacks a product or service, he tends to search for it in new places.

Conclusion

From the above discussion, it is evident that diversification is an important tool in profit maximization for businesses, but the end result is determined by the approach method used by a business. To be successful when diversifying, a company needs to focus on customers, invest in innovation and creativity, implement and communicate its vision, and leverage on brand and image. Failure to observe the above will result in loss of the company`s customers and further loss of revenues generated from sales and marketing. Conclusively, it is advisable for the management of a company that is contemplating diversification to critically think through the issue so as to ensure that the end result would be beneficial for all stakeholders.

   

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