The secret diversification trap: Why more isn’t always better
In my role advising Fortune 500 CEOs and wealthy business owners globally, one common mistake I see is the rush to expand and diversify. There is a widespread misconception that by spreading into more industries and areas, a company can reduce risk and set the foundation for sustainable success.
However, nothing could be further from the truth. Companies often end up losing time, money and opportunities by diving into areas they don’t fully understand, or where they have no competitive advantage.
The principle every CEO or business owner should internalize is this: invest in expansion and diversification only when there is a high probability of success. This means that expansion shouldn’t be treated as a gamble where various projects are tried out just to see what sticks.
Instead, successful diversification requires deep insight into your own core competencies and a keen understanding of the market.
The value of focused strategy
Diversification should be approached strategically, not reactively. By focusing only on big opportunities that have the highest chance of success, you can make sure that your efforts and resources are aligned with your long-term goals.
A great analogy is thinking of your company as having a punch card with a limited number of slots for major investment decisions. You should treat each of those slots with utmost importance, ensuring that each one is used for a calculated, high-reward bet.
Take Warren Buffett, for example. His investment approach with Berkshire Hathaway is to focus on a few big, well-researched bets rather than spreading out over numerous investments. This laser-focused strategy has been crucial to his long-term success. Buffett’s ability to identify strong opportunities and ignore those with less certainty is a fundamental principle of successful diversification.
As Buffett famously said, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
When diversification goes wrong
While strategic diversification can yield high rewards, poorly planned diversification can be catastrophic. A classic example of this is Quaker Oats’ acquisition of Snapple in 1994. Quaker, primarily known for its breakfast foods, ventured into the beverage industry by purchasing Snapple for $1.7 billion.
However, they misjudged the complexities of the competitive beverage market and ultimately sold Snapple for a mere fraction of what they paid just a few years later. It was a classic case of expansion without sufficient understanding of the market and the challenges ahead.
Similarly, Xerox’s attempt to diversify into the computer industry in the 1970s was another diversification misstep. Originally a leader in photocopiers, Xerox ventured into computers without the necessary expertise or infrastructure. This venture cost the company billions of dollars and led to massive losses in market share, as they were unable to compete with more established players in the tech space.
These examples from the corporate world are just part of the story. In my own experience advising businesses, I’ve seen similar issues firsthand. For instance, I’ve worked with a multinational conglomerate that was dominant in a specific sector but decided to branch out into unrelated industries without fully evaluating the market dynamics. The move caused internal confusion, stretched resources thin and led to significant losses.
The lesson here is clear: diversification without a solid plan and understanding of the market is a dangerous game.
Unfair advantage is key
So, when should a business diversify? The best time to diversify is when you can enter a new market with an unfair advantage. An unfair advantage could be superior technology, better market knowledge, a unique supply chain, or a team with exceptional expertise. Without these, you’re entering a new market on equal footing with everyone else, making success much harder to achieve.
This principle applies equally to small businesses and massive conglomerates. When Apple moved into the smartphone market, they had an unfair advantage in their brand strength, user experience expertise and their ecosystem of devices that could all work together seamlessly.
This kind of strategic diversification, based on their clear competitive advantage, allowed them to dominate a new market.
The secret to long-term success
The best leaders focus their time, energy and resources on a few key initiatives that they believe will drive the most success. It’s tempting to try and do everything—to be everywhere in every market at once—but this approach is often the fastest route to mediocrity.
Long-term success requires saying “no” to the good opportunities in order to focus on the great ones. One of the most important aspects of successful diversification is knowing when to say no.
Saying yes to every opportunity that comes along can spread your resources thin and dilute your brand’s power. As a leader, you should be ruthlessly selective about which opportunities you pursue, focusing only on those that align with your company’s strengths and vision.
Lessons for business leaders
If there’s one takeaway for business leaders looking to diversify or expand, it’s this: Diversification is not a silver bullet for growth. It’s a tool, and like any tool, it must be used with precision and care.
Here are a few guidelines to follow when considering diversification:
1. Stick to your strengths. Focus on areas where your business already has a competitive advantage or expertise.
2. Do your homework. Ensure you thoroughly research new markets before diving in. Success in one market does not guarantee success in another.
3. Look for synergies. Seek out opportunities where diversification can complement or enhance your core business.
4. Don’t spread yourself too thin. Prioritize opportunities that have the greatest potential for long-term success, and don’t try to expand into too many areas at once.
5. Test small before scaling big. If you’re unsure about a new venture, start with a small-scale test to see if it aligns with your expectations and goals.
Conclusion
Diversification can be a powerful strategy for growth, but only when done thoughtfully. The best CEOs know that bigger isn’t always better. Instead of chasing after every new opportunity, focus on the few that offer the highest potential for success, where you can enter with a distinct competitive advantage. By doing so, you’ll position your business for sustainable, long-term growth and avoid the pitfalls that come with hasty, poorly planned diversification.
