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Blog on Diversification case for Apple Inc.

Diversification case for Apple Inc. by Dr.FrapetphD

8

Jun

2020

Diversification is a business strategy that firms use to enter into new industries by developing new products. Businesses must diversify as it cushions firms in the event where one of its business interests suffers an economic downturn. Therefore, if one area of the business suffers an adverse market environment leading to losses, a better performing segment of the company helps to keep the firm afloat (Ketchen & Short 2018). Companies also use diversification strategies for growth, and to ensure that a diversification strategy is viable, it must meet a few requirements. First, the industry to which a company is diversifying should have the potential for profitability. Such profitability will enable the business to recover all the expenses and costs that a firm used to expand into that new industry (Ketchen & Short 2018). Also, a diversified firm should be better off than it was by acquiring some competitive advantages; otherwise, it will not make sense to diversify. A business can either use related or unrelated diversification. In related diversification a firm enters a new industry that has similarities to the kind of industry it operates. To succeed in this kind of diversification, a firm could utilize its core competence to exploit a new line of business.  Consequently unrelated diversification results when a firm enters into an industry unrelated to the industry it operates  

Benefits of Diversification

Risk of loss minimization: In any period where one section of the business performs dismally, other better-performing companies can be used to offset such losses, rather than having all the eggs in one basket. Capital Preservation: Diversification helps protect savings. Since not every investor is after accumulating capital, some like those nearing retirement primarily focus on capital preservation. Generating returns: Diversified business creates multiple streams of income. As not every time investments will perform to expectations, it's essential to have more than one stream of income (Janssen, 2011).

Apple Inc. Diversification in Attainment of Strategic Goals

Presently, Apple Inc. has undergone massive diversification in the last ten years, and this has enabled the company to become more valuable, stronger, and profitable. It started with Mac computers, later on, came the iPod followed by the generation of the iPhone and lastly the iPad. This makes the company more of a consumer brand than just a computer company. Apple's future outlook has always been a stronger one, and it has ensured this through diversification in wearables and services such as Apple Music, Apple App Store, iCloud, Siri, retail stores, and Apple Pay (Heracleous & Papachroni 2016).

Wearables

Apple's wearables are the apple products other than computers that can be worn, and they include Beats headphones, Airpods, and watches. According to Tim Cook, the wearables business every year experience double-digit growth. For instance, in the first quarter of 2018, the business grew by 50% (Yarow, 2018). The market for wearables, especially the headphones and watches, is primarily dominated by Apple, with the only close competitor being Fitbit, whose market value is on the decline. The firm is also contemplating the development of augmented reality glasses. Since it has a track record of creating fancy and trendy products, Apple will likely succeed where others like Google have failed. The consumer will then be adequately satisfied by the various wearables, the watch for his wrists, the glasses for the face, and Airpods for his ears (Yarow, 2018).

 

 

Services

Apple's diversification in services has been in areas such as Apple Music, Apple App Store, iCloud, Siri, Apple Pay, Retail stores. iCloud service is available to iPhone users, which consumers use as expanded storage for their data beyond the memory of the phone. Also, iPhone consumers perform in-app purchases using Apple Pay and download all their Apps from the Apple App Store, all of which are diversified services by Apple Inc. People owning iPhones are probably subscribed to Apple Music from where they download and pay for music. Apple also offers Siri, an intelligent voice application for iPhone 4s onwards. The application is intended to replace keyboard or touchscreen use. Siri's application as a map service for Apple is designed to rival Google as a search engine (Heracleous & Papachroni 2016). The past decade has also seen Apple establish its chain of over 300 Apple retail stores from where they make product launches relying less on other supply chain partners. The year 2019, has also seen the firm diversify into financial services by introducing Apple cards that consumers can use to make purchases (Yarow, 2018).  The card promises extra features than regular cards as it offers cashback incentives, 3% cashback on purchases from Apple, and 2% cashback on Apple Pay purchases daily. Such services contribute to Apple's growth in revenue since they are creations of multiple streams of income, and are growing steadily.

Diversification Challenges

It's not a guarantee that all diversification attempts succeed as some usually lead to devastating consequences, as the flop in Harley Davidson attempt at bottled water. There is always a risk in starting a new business and getting a balanced investment portfolio, which seems easy in theory but not in practice. There is also the problem of how long it would take to recoup an investment. A new business will not give a return on investment, immediately making it a high stake gamble. A firm may inherit problems by buying off a business as a diversification strategy, such as a negative brand reputation or capital problems. Moreover, if the two firms gain no competitive advantage by diversification, the strategy will more likely fail. Therefore, in summary, diversifying firms should ensure that; It is an attractive industry where the firm has some chance of generating profits. Costs incurred should be realistic to a business, such that the firm takes the least amount of time to break even. Finally, a diversification strategy should be one that adds value to the firm by creating a competitive advantage (Ketchen & Short 2018).

 

 

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