If Amazon opted to pursue a strategy of related diversification: 1) what industr
ID: 361960 • Letter: I
Question
If Amazon opted to pursue a strategy of related diversification: 1) what industries or product categories could [it] diversify into that would allow [it] to capitalize on using Amazon's present brand name and corporate image to foster an advantage in these newly entered businesses or product categories; 2) Name at least two or three such industries or product categories, and indicate what specific benefits might be captured by transferring Amazon's brand name to each of these businesses/product categories; 3) Would you prefer to pursue a strategy of related or unrelated diversification? 4) Why ?
Explanation / Answer
First, it is important to understand what related diversification means. Related diversification simply means getting into a line of business which is similiar to its core business. For example, a company manufacturing notebooks getting into manufacturing paper would be an example of related diversification.
Now, let us get to your questions:
1) If Amazon had to capitalize on its present brand value, then it would have to diversify into related businesses and make good use of the brand it has already built.
What do you as a consumer think of when you think Amazon? 6/10 customers would connect Amazon with electronics. This is the case with most e-retailers, as the trend is to offer heavy discounts on electronics. Hence, one key area where it can diversify would be to come up with its own line of electronics. Amazon has already started in a way with its e-readers and amazon basics line of products. However, it can further diversify into a wide variety of consumer electronics such as smartphones, lights, home appliances, durables (washing machines/TVs etc) to name a few. This is called Private Labelling
2) We have already addressed this above, but let me list out a few industries that I can think of where Amazon should diversify:
a) Apparel: Fashion is a big chunk of Amazon's business, and there is huge potential and huge margins in the apparel business. Amazon's brand is only going to augment the products in the market should it decide to go for it, as Amazon is generally related with trust and customer friendliness
b) Electronics: I mean a wide variety of electronics (Amazon is already in some of them), especially smartphones. Though Amazon did make an unsuccessful attempt earlier, it should re-think its strategy towards how the phone should be built and re-enter this market
c) Transportation Services: Amazon should also think of offering its logistics services to other e-tailing companies as a service. Amazon has a very well established logistics service, till the last mile. It can definitely foray into the B2B segment by offering this as a service to other competitors in the market.
Amazon has already built a great brand in terms of customer trust and quality. By diversifying into the right areas, it can captalise on these markets riding on the strength of its brand.
As for the last question, Both diversification methods have their own strengths and weaknesses. Related diversification has a major strength as the company is diversifying into related fields, it clearly knows how to get to a strong position from day 1. Also, diversifying into related fields will further augment the company's overall position
Unrelated diversification might require more investments as it is a market which the company does not know much about. However, a key advantage here is that if the core industry goes down due to market forces, then the company will still make revenues through the unrelated diversification it made (as it is a completely different industry). Had it made a related diversification, it would have gone down along with the core market.