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Business Strategy

Diversification Vs Focused Business Strategy

Diversification Vs Focused Business Strategy
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Every startup reaches a market stagnation point during its transition to a bigger organization. This is the time when its product portfolio needs that little extra for further growth. How does one decide if the time is right or the new portfolio is correct? Companies are presented with two choices: to remain focused or diversify. However, most of the times, most people look at this as a choice: You can have one or the other at a time.

This leaves organizations see-sawing between strategies unable to decide the way ahead. However, this need not be the case. While the traditional thought has been that the decision to focus or diversify is an either-or case, the truth is that focus and diversification can coexist. Before we launch into the how of it, let us consider the why.

Much can be said for a focused strategy. It can pull you out of stagnation and bring in profitability through process innovation which includes structured, automated way of dealing with the existing portfolio resulting in cost-effectiveness.

However, it has limited vision: while it can do much to optimize your operating expenses, it may not be the best strategy to boost revenues. Moreover, people look for convenience and something extra while selecting a brand. This behaviour will drift them to other brands to get that additional product or service. Social media sites such as Digg is an apt example. Even camera giant Kodak is a case in point. Despite a huge brand following, neither companies could keep up with the times, and eventually lost out.

It is at this point that diversifying looks like an appealing strategy. However, diversifying takes time and most start-ups, during transition, do not have the resources to fight on many fronts at the same time. Moreover, if you bite-off more than what you can chew, it can bring your entire business down.

Unsurprisingly, success stories abound: Nokia and Virgin to name a couple, and so do costly failures: Lego’s attempt at being a lifestyle brand or Coca Cola’s purchase of Columbia Pictures still leave one bewildered. Diversification remains an unpredictable, high-stakes game, especially for startups.

Nevertheless, if the right strategies are in place, each one can balance the other and increase the benefits they bring to an organization. It pays to think beyond the either-or scenario and look at a combination of the two. Here are some points to consider before you decide on a combined strategy.

Centre diversification around your core business

The first step is to define your core business, and reapply the definition of ‘Focus’ to it. Focus does not necessarily have to be about how broad or narrow your business is; it has to do more with how every one of your diverse capabilities tie together to create value to your company. Bring focus into the way to diversify, and ensure they complement the core business.

Google has achieved this spectacularly. Every one of their businesses are very tightly integrated with their core business of search and ads. Every one of their products are aimed at getting more and more people into Google’s ecosystem or vice versa, i.e., use the ecosystem to push other products. So, despite having seemingly diversified into so many things including self-driving cars and solar power plants, their core business in the centre of all diversification and all their strategies are focused around it.

So when we, at BankBazaar.com, diversified from B2B business of providing technology-based banking solution into the B2C business of personal finance marketplace, our focus remained same – technology. Our foray into B2C complemented our B2B business. The world-class seamless and secured technology profited both our partners (financial institutions) with cost advantage and our customers with smart savings.

Align your diversification to get repeat customers

Any business is dependent on the repeat customers. Hence, diversification should only happen to strengthen a company’s existing business by enhancing its value proposition for customers – like Coca cola’s fruit juice business or Disney’s Pixar acquisition. These diversification ensured repeat purchase by the same customer for different but related needs. Even at BankBazaar, each time we diversified into a new segment – be it loans, insurance, or investments – it was a part of reinforcing our value proposition.

Get the timing right

As your business develops, widening your product offering or range of services is a natural progression. However, your priority before any diversification should be to make your core business stable in terms of both capital and resources. Your core business is what would fund the diversification for some time. If it is losing its steam and becoming unviable, then your priority should be to shore it up rather that looking for other options.

Secondly, an existing business requires significant amounts of management’s time and energy. Hence it is essential that they look at the team structure within. Even a well-established business can suffer if resources are spread too thin. So, management teams must have not only have the responsibility but must also be empowered to move things forward.

The bottom-line is that the recipe for success lies in identifying your strengths and competence and working with them. Both diversification and focus are two sides of the same coin and have equally enough to contribute if strategize right. The lessons that can be learned from a company’s diversification moves can be significant. At the same time, there are important questions a business needs to answer before deciding on the strategy to get the hoped-for results.

Edition: December 2016

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