The question is as old as the history of business strategy itself. For long, companies have gone after one or the other. In most companies, a leader who chooses focus is invariably followed by one who seeks diversity. The puzzle presents itself in its full glory during times of change and rapid flux as companies struggle to sustain growth amidst growing competition.
When companies choose to specialise, they usually go after specific markets, products or technologies around which they develop a story. In times of constant change there is risk that such a focused approach could be mistaken for corporate lethargy, particularly if the returns plateau. Diversification, on the other hand, is thought of as an adventure where uncharted territories are targeted to act as the engines of change and growth.
Numerous examples abound of companies that have succeeded, in the long run, by remaining wedded to their core and of those that have grown along seemingly disparate dimensions and consistently at that. A famous example of rapid diversification is PepsiCo that decided to diversify in the 1980s and ended up with a portfolio that included North American Van Lines and Wilson Sporting Goods, which they ultimately gave away to focus on their core a decade down the line. Oil companies on the other hand have remained true to their chosen industry and have sustained and succeeded.
To take a path less chosen, let us consider companies or conglomerates that are not large by economic standards. Mid-size companies are the ones that face growth challenges during every recessionary cycle and are invariably drawn into this puzzle. So, is there a method to understanding what would work? The key might actually lie in a bit of a self-discovery to understand what the organisation believes to be "specialisation" or "diversification". Many companies choose to define their core as a product, service or market. Consider the case of a group of companies. Is it possible to identify that one activity in which every company in the group consistently outperforms its peers? That just might be the foundation you want to build around. This might be something as simple as a technical capability or something much softer such as customer experience, vendor development, talent management
or innovation. The core needs to be something tangible and measurable.
Diversify or specialise
The key to making the right decision, ironically, is identifying your core. For a small to medium sized group, if there is a specific "core" that fits the definition laid out earlier, building a portfolio that helps create value by leveraging that competence will bear fruit. It might so happen that it isn't possible to identify a specific core for a group. In such cases the decision determinant is purely economic value-add as an investor, mainly in disruptive opportunities.
The last 20 years have witnessed dramatic upheavals in the structure and operation of businesses, and the pace of change has increased. The ideal strategy for today's times is a blend of core and diversification with one following the other and not being mutually exclusive. A structured exercise to understand what you do best in a replicable, differentiated and efficient manner holds the key to charting the course of your business ambitions, either as a standalone player or as a group.
So, is there a silver bullet?
The much-maligned word nowadays is change. It has become self-defeating to speak about living in times of change as it has become the norm. New business models are born, thrive and collapse at a pace quicker than ever before. During times of such change the urge to run quicker and more often is strong. Business leaders need a marathoner's instinct to dig in and play for the longer term. Identify your strengths and play to them. Maintaining a sharp focus on sustaining an identified "core" will ensure that decisions on diversification answer themselves.
Does this translate into an argument for sticking with a core or diversification? The simple answer is that companies or business groups need to identify what they do best and build their plan around it. Navigating through troubled waters might be easier when you don't anchor yourself to a specific product or market but rather to your skills. Building diverse businesses around such a core might just be the way to ensure sustainable value creation.
Director, strategy & implementation consulting, MENASA, Frost & Sullivan
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