For brands that seek growth, the topic of growth through diversification will eventually arise. Imagine an apparel brand that sees opportunity in a new category. Or a restaurant chain that is eyeing a new geography. Or a brick-and-mortar retailer that is thinking about selling its goods online. All of these brands are considering growth by diversifying their current business. And all of these brands may be setting themselves up for failure.
The fact of the matter is that seventy-five percent of diversification efforts fail.1 However, for the twenty-five percent that do succeed, they succeed materially, growing revenue three times faster than peers on average.2 This article aims to highlight the best practices of those that most effectively grow by diversifying their business and their brand.
Three Rules for Diversification
It should go without saying that brands that successfully diversify have strong core businesses in the first place. How do you plan on generating sustainable growth in new areas without a solid base business as your foundation? That healthy base business is table stakes. With that said, here are three rules for effective diversification:
- Never put your core business at risk
- Diversify where you expect to win
- Pursue one opportunity at a time
#1: Never put your core business at risk
New growth opportunities can be exciting and motivating – but they can also consume significant time and resources. A primary question to ask is whether the brand can afford to diversify, given the needs of its current core business. Companies that diversify most effectively do so intelligently, ensuring that new investments of time, energy, and resources do not compromise the requirements and overall health of the core business.
#2: Diversify where you expect to win
To win when diversifying – as in most areas of business – capabilities are key. To this end, brands must carefully identify the capabilities necessary to win in a new market, honestly evaluate their own strengths, and then objectively determine whether they have or can acquire what it takes to become a leader in that new market – and not just another player. All too often, brands over-estimate their own capabilities and assets relative to those of incumbents. That lack of candor or self-awareness will be the root of a failed diversification effort.
#3: Pursue one opportunity at a time
It takes sharp focus to fully realize the potential of a growth opportunity. And for that reason, successful diversification efforts keep it simple by addressing one opportunity at a time. This means one new geography or distribution channel or product category at a time – because success in any one of those areas comes with numerous requirements. In this case, simplicity begets success.
Here is an example. For an apparel brand considering multiple new product categories, the brand should focus its efforts on one key category at a time, prioritizing the category that plays most to its current strengths, that represents an attractive “size of prize,” and that signifies the highest probability of success versus category incumbents.
Most brands seek growth of some kind – and diversification is a popularly cited platform for that growth. However, the majority of diversification initiatives fail. To succeed in growing your brand through diversification, carefully consider the following: ensure that you are not putting your core business at risk, that you are diversifying into markets where you can win, and that you are focused on one key opportunity at a time.
1 “Growth Outside the Core,” Harvard Business Review, Chris Zook and James Allen