Focus and diversification are often presented as a choice: You can have one or the other. Which strategy is right for you? Fast forward to today: The company is seeking diversification into new businesses such as energy and sports drinks because growth in its main business has again stagnated.
And around and around we go. The good news, though, is that focus and diversification can successfully coexist. In fact, with the right strategy, each can increase the benefits the other brings to a company. But for this to work, you have to redefine what you mean by focus and rethink your reasons for diversification.
But this misses the point. Instead, you should think about focus in terms of how much your businesses materially benefit from the distinctive capabilities that make your company better than any other at its way of creating value. A narrow company operating in related markets can be unfocused.
For example, think of oil and gas companies, with their portfolios of exploration, production, refining, and retailing businesses. Few if any of these companies have capabilities that are both distinctive and relevant to every one of their businesses. Although their portfolios comprise businesses operating in highly related markets, each business requires very different capabilities to win in its own particular market. The opposite case can be made about broad companies: They can be focused even though their businesses compete in unrelated markets.
All three companies could be called conglomerates. But they are also highly focused companies. Using this definition of focus, there are only two reasons to diversify. They are not doing it for the reasons that too many other companies diversify: This is financial engineering, not strategy, and it always leads to lack of focus.
Disney is often referred to as an entertainment conglomerate, with its theme parks, toy stores, Broadway shows, television programs, and more. But in fact the company is focused: Its original business is animation, which creates and popularizes the characters that feed all its other businesses with a few major exceptions, such as ESPN.
But the emergence of digital technology threatened this essential business, as companies such as Pixar were able to drastically reduce the cost of animation and enhance what it could do. So, although Disney brought a lot to Pixar, Pixar helped Disney fortify a distinctive capability that brings coherence to its massive entertainment complex. Lego gives us an example of how diversification can enhance the value proposition of your current business.
The company has had two big diversification drives in its recent history. The first, which ended in the early s , was motivated by financial engineering and nearly bankrupted the company. The second started around , and has made Lego the largest toy company in the world. This time around, every new area that Lego entered—amusement parks, education, virtual model construction, and movies—has helped to increase the engagement of children and parents with Lego building blocks.
When you define focus in the right way and have the right reasons for diversifying, your moves to grow beyond your current business are much less likely to put you on the merry-go-round.
And instead of diluting what makes your company great, you will enhance it. The item has been saved. Best Business Books Will Stronger Borders Weaken Innovation? Realigning Business, Economies, And Society. Building Trust while Cutting Costs. The Neuroscience of Strategic Leadership.
From the Outside In. Creating a Strategy That Works. My Settings My Profile. Current Issue Past Issues Outlook 20th anniversary. The good news is that focus and diversification can successfully coexist.
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