Harvard Case - Leyaoyao's Diversification: Vertical Or Horizontal?
"Leyaoyao's Diversification: Vertical Or Horizontal?" Harvard business case study is written by Chuang Wang, Mina Bai, Dai Yao. It deals with the challenges in the field of General Management. The case study is 10 page(s) long and it was first published on : Feb 21, 2023
At Fern Fort University, we recommend Leyaoyao pursue a horizontal diversification strategy by expanding into new product categories within the beauty and wellness industry. This approach leverages Leyaoyao's existing brand recognition, distribution channels, and expertise in the Chinese market while minimizing the risks associated with entering entirely new industries.
2. Background
Leyaoyao, a leading Chinese beauty and wellness company, is facing a crossroads. Its current product portfolio, primarily focused on skincare and cosmetics, is experiencing slowing growth in a saturated market. The company's founder, Ms. Li, is considering two diversification options:
- Vertical Integration: Expanding into upstream activities like raw material sourcing and manufacturing.
- Horizontal Diversification: Entering new product categories within the beauty and wellness industry, such as hair care, body care, or fragrance.
Ms. Li seeks guidance on the best path forward to ensure Leyaoyao's continued success and growth.
3. Analysis of the Case Study
SWOT Analysis:
Strengths:
- Strong brand recognition and customer loyalty in China.
- Extensive distribution network and established relationships with retailers.
- Expertise in product development and marketing within the beauty and wellness sector.
- Strong financial position with a history of profitability.
Weaknesses:
- Dependence on a single product category (skincare and cosmetics).
- Limited experience in other beauty and wellness segments.
- Potential for cannibalization of existing product lines.
Opportunities:
- Growing demand for premium beauty and wellness products in China.
- Increasing consumer interest in natural and organic ingredients.
- Expanding online sales channels and e-commerce platforms.
Threats:
- Intense competition from both domestic and international brands.
- Fluctuating raw material prices and supply chain disruptions.
- Potential for regulatory changes impacting the industry.
Porter's Five Forces Analysis:
- Threat of New Entrants: High, due to the ease of entry for new players with online distribution channels.
- Bargaining Power of Buyers: Moderate, as consumers have various options, but Leyaoyao's brand recognition provides some leverage.
- Bargaining Power of Suppliers: Moderate, as raw materials are sourced globally, but established relationships with key suppliers offer some protection.
- Threat of Substitutes: High, as consumers can choose from a wide range of products within the beauty and wellness industry.
- Rivalry Among Existing Competitors: High, with numerous domestic and international brands vying for market share.
Financial Analysis:
- Leyaoyao's financial position is strong, allowing for investment in diversification initiatives.
- The company needs to assess the profitability and return on investment (ROI) for both vertical and horizontal diversification options.
- A detailed financial model should be developed to evaluate the potential impact on revenue, costs, and profitability.
4. Recommendations
Leyaoyao should pursue a horizontal diversification strategy by expanding into new product categories within the beauty and wellness industry. This approach offers several advantages:
- Leveraging Existing Strengths: Leyaoyao can capitalize on its established brand, distribution channels, and expertise in the Chinese market.
- Minimizing Risk: Entering new product categories within the same industry reduces the risk of venturing into unfamiliar territories.
- Meeting Growing Consumer Demand: Expanding into hair care, body care, or fragrance caters to the increasing demand for comprehensive beauty and wellness solutions.
Specific Recommendations:
- Identify Target Product Categories: Conduct thorough market research to identify high-growth and profitable product categories within the beauty and wellness industry.
- Develop New Product Lines: Leverage existing product development expertise and invest in R&D to create innovative and high-quality products that meet consumer needs.
- Expand Distribution Channels: Explore new online and offline distribution channels to reach a wider customer base.
- Marketing and Branding: Develop targeted marketing campaigns to introduce new product lines to existing and new customers.
- Monitor Performance and Adapt: Continuously track the performance of new products and adjust strategies as needed.
5. Basis of Recommendations
This recommendation aligns with Leyaoyao's core competencies and mission to provide high-quality beauty and wellness products to Chinese consumers. It also addresses the external customer needs for a wider range of products and the internal client desire for growth and innovation.
The competitiveness of the beauty and wellness industry is high, but Leyaoyao's strong brand and existing distribution network provide a competitive advantage. The attractiveness of horizontal diversification is supported by the growing demand for premium beauty and wellness products in China.
Assumptions:
- Leyaoyao can successfully develop and launch new product lines that meet consumer expectations.
- The company can maintain its brand reputation and customer loyalty while expanding into new categories.
- The Chinese beauty and wellness market will continue to grow in the coming years.
6. Conclusion
Leyaoyao's pursuit of horizontal diversification presents a strategic opportunity to capitalize on the growing beauty and wellness market in China. By leveraging its existing strengths and minimizing risk, the company can achieve sustainable growth and maintain its leadership position in the industry.
7. Discussion
Alternatives:
- Vertical Integration: While vertical integration can offer control over supply chains and potentially lower costs, it requires significant investment and expertise in manufacturing and raw material sourcing. This option carries higher risks and may not be the optimal strategy for Leyaoyao at this stage.
- Acquisitions: Acquiring established players in new product categories could accelerate market entry, but it requires significant financial resources and integration challenges.
Risks:
- Cannibalization of Existing Products: Expanding into new categories could negatively impact sales of existing products.
- Competition: The beauty and wellness market is highly competitive, and Leyaoyao may face challenges from established players.
- Consumer Acceptance: New product lines may not resonate with consumers, leading to lower-than-expected sales.
Key Assumptions:
- The Chinese beauty and wellness market will continue to grow at a healthy pace.
- Leyaoyao can successfully develop and market new products that meet consumer needs.
- The company can manage the risks associated with entering new product categories.
8. Next Steps
- Market Research and Product Development: Conduct thorough market research to identify target product categories and develop innovative product lines. (3 months)
- Distribution Channel Expansion: Explore new online and offline distribution channels to reach a wider customer base. (6 months)
- Marketing and Branding: Develop targeted marketing campaigns to introduce new product lines to consumers. (6 months)
- Performance Monitoring and Adaptation: Continuously track the performance of new products and adjust strategies as needed. (Ongoing)
By implementing these steps, Leyaoyao can successfully navigate the challenges of diversification and achieve sustained growth in the dynamic Chinese beauty and wellness market.
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Case Description
Guangzhou Leyaoyao Information Technology Co. Ltd. provided online-payment services in Guangzhou, China. In 2017, the company entered the claw-machine market and became the leader in the industry's online-payment services within two years. To further develop its business and improve its market power, the company was considering diversification through vertical integration within the claw-machine industry or horizontal expansion to other types of offline physical devices. Both options held potential benefits and risks. Vertical integration would enable the company to enhance its market position, lift entry barriers, and develop a new revenue model within the claw-machine business, but consolidation costs could be substantive and the relatively small scale of the claw-machine industry could be a constraint for the company's future development. Horizontal expansion would allow the company to apply its core competences from the claw-machine industry to other offline and networked facilities, but it could be challenging due to established market leaders in other sectors. Which option would broaden the company's business boundaries: vertical integration or horizontal expansion?
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