Horizontal diversification is a very popular growth strategy in business. It involves adding new products to your portfolio for markets that are similar or related to your existing customer base, with the ultimate aim of making your business bigger, increasing revenues and, above all, creating a more versatile, resilient, and future proof organisation.
There are several routes to successful horizontal diversification; you could develop new products in-house, leveraging your existing patents and technologies, and adding new divisions. Or, you could acquire other businesses who already have these capabilities. Indeed, this is one of the benefits of horizontal diversification; there is more than one way in which you can make it work for your particular venture.
So, how does it work in reality?
Examples of Horizontal Diversification
In order to illustrate this point, and demonstrate in real terms how horizontal diversification works and what it can achieve, we've compiled a list of companies that have mastered this strategy – whether through aggressive acquisition or in-house product development.
Here are our picks:
Apple | From Computers to MP3 Players and Phones
For decades, Apple was a brand strongly rooted in the computer and software segments of the tech industry. From 1976 onwards, they created iconic computers such as the Macintosh series, but by the late 1990s, the company was struggling in this market, falling way behind its main rival Microsoft and their hardware partners.
Under the guidance of Steve Jobs, however, the company's fortunes changed drastically, with the groundbreaking launch of the iMac and iBook series in 1997. With the rise of digital music downloads, the iPod was also a success upon its release in 2001, but their biggest success in product diversification was undoubtedly the launch of the first iPhone in 2007.
Thanks to this continued diversification (other prominent products include the iPad, the Apple Watch, and Apple TV) the company has been able to create an entire ecosystem of interlinked tech products – a core driver of its entire business model. It is now one of the biggest and most valuable brands in the world and, although all their products are developed in-house and have a distinctive style, Apple has acquired dozens of smaller firms (such as PA Semi and Intrinsity (for smartphone SOC chips), Polar Rose, FingerWorks, and IMSense (for the iOS software ecosystem), and Poly9 and Coherent Navigation (for Apple Maps)) to improve their products.
Disney | From Cartoons to Cruises, Theme Parks, and Media
Although the Walt Disney Company built its initial reputation in animation and children's cartoons in the early 20th century, the company has pursued an aggressive diversification strategy, looking at numerous ways to cater to their core demographic of children and family audiences.
Indeed, this diversification strategy has been cultivated over a significant period, with the launch of the first Disney World theme park as far back as 1955. But it gathered significant pace in the 1990s and beyond, with the company cementing its place in the entertainment and media industry through acquisitions of Miramax Films, ABC, Fox Family, Pixar, Marvel, LucasFilms, and 21st Century Fox.
The acquisition of Pixar is a particularly good example of Disney's approach. 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. Their acquisitions of Marvel and LucasFilm, meanwhile, has given them ownership over the merchandising and image rights of some of the world's most iconic media brands, while its ownership of 21st Century Fox has provided a huge catalogue of movies and television shows for the Disney+ digital streaming service – a key competitor to established giants such as Netflix, Amazon Prime, and Apple TV.
Disney has also ventured successfully into family-friendly vacations through a bouquet of theme parks and hotel resorts. They even ventured into the cruise business in 1998, when they failed to find new partners for licensed cruises to Disney World resorts.
Volkswagen | Selling Cars to Everyone
Founded in 1937, the German car manufacturer had the initial mission of developing a "people's car" under the Nazi government. Over the years, however, the company has made a spate of acquisitions in the automotive business, acquiring other car brands and marques to cater to a wide range of customers.
In 1965, for instance, they acquired Audi, a premium car brand aimed at business executives and other high-income customers. The Bentley marque was also acquired over a series of deals in the 1990s and 2000s, while Bugatti and Lamborghini were acquired in 1998, giving the company a huge presence in the luxury car segment.
The company also targets lower-end consumers, too. In the budget market for passenger cars, Volkswagen sells its own eponymous brand, as well as cars produced by SEAT and Skoda. They also acquired Scania AB and MAN SE to improve its commercial vehicle business, as well as venturing into the sports car market through the purchase of Porsche (2009), and the motorcycle market with Ducati (2012).
Altogether, the Volkswagen Group has around 15 unique brands in their passenger and commercial vehicles segments as of 2020. Their diverse lineup gives them access to a wide range of markets across the world, catering to every possible taste and customer profile.
Estée Lauder | Cosmetics, Personal Care, and Perfumes
Based in New York, Estée Lauder is one of the largest cosmetics brands in the world; it generated sales worth $15bn in 2019 alone and is present on the Fortune 500 list of the most valued companies in the US. Yet Lauder started as a simple makeup and cosmetics brand in 1946, with a catalogue that included just three products: lotions, creams, and cleansing oil.
It wasn't until it diversified horizontally into related markets that the company started to see real growth, launching the Aramis men's fragrance in the 1960s. In the 1990s, it acquired the hugely successful MAC and Bobbi Brown makeup brands to strengthen its hold on the cosmetics market, and gain access to new demographics.
Estée Lauder also diversified into the haircare segment when it acquired Aveda in 1997, strengthening this purchase with the integration of Bumble & Bumble – a salon and hair products brand – into the company's portfolio in 2006. With over 25 different brands in skincare, cosmetics, makeup, and haircare, Estée Lauder has shown that diversification into related markets – whether through acquisition or in-house production – is the key to growth.
Pepsi and Coca-Cola | Beverages to Snacks and Energy Drinks
As fierce rivals with similar products and backgrounds, Pepsi and Coca-Cola have conducted much of their diversification in direct competition with each other. Just like the similar taste of their signature drinks, however, both firms have charted fairly similar strategies.
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 just some of the brands in this sector 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, its drinks portolio almost mirrors Pepsi's. It also sells fruit juices (Minute Maid), energy drinks (Powerade), mineral water (Glaceau), and coffee (Costa Coffee), while it even made an eventful foray into the wine market in the 1980s.
Thanks to their horizontal diversification strategies, 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.
What other successful examples of horizontal diversification have inspired you? Let us know your thoughts in the comment section below!